lets draw a line in the sand – technıcal update – Buffett

A first step into the right direction was the concerted liquidity injection of central banks and that HBOS was taken out of the negative spin. WAMU and MS still need a safe haven solution. Although MS had a good quarter on paper, they are not out of the fundamental problems. Their balance sheet is still vulnerable and, during these days, just the fact they might be in jeopardy takes away their core business – trading with clients.

That was the big mistake the FED and Paulson made about not bailing out LEH. People see they cannot unwind the trades easily and if at high cost. The ones owing LEH are not eager to pay and the ones who ought to get money have trouble realizing it and at a far different price than they may have marked. I once discussed that with a friend and we agreed the danger of these $450 tril. derivatives. The danger is that on paper every loser has a winner in the balance, but once the loser has accumulated too many losses he will go bust and the winner then also turns into a loser, since he does not get his money. Many trades are connected and correlated to each other through various ways, therefore we have a system that merely by a participant in size (LEH), it can disturb the system enough to easily collapse. That’s what Mr. Paulson and Bernanke do not seem to understand, although by their background they should be capable to enough to get it.

The stupid argument not to expose taxpayers’ money has cost the world within a week between $7-10 tril., compared to $50-70 bil. – that’s a no-brainer in my mind. The most important thing in global financial markets is trust and faith. Once, they used to operate on the basis of “my word is my bond”. But the FED and Treasury did not force the banks to be transparent and frank about their balance sheets, which would have been the systematic or healthy approach to face the upcoming distress with a bitter pill. Instead, they choose the way of being unfaithful themselves. I watched the banking committee hearings and it was disgusting to hear these men testifying. Where did they take the hubris to declare that things were contained and under control? Most annoying is the fact that they cannot do the simple math and understand basic market psychology. At that stage, giving Fuld the freedom to make his insane calls (that is a case which needs to be prosecuted for) and later not to bail a $1 tril. balance sheet out were crucial mistakes.

The mistake started even earlier, on how they dealt with the GSE’s or even Bear Stearns – had they introduced the broker lending facility a week earlier they could have salvaged something, but Mr. Bernanke having declared this as an unthinkable option in a hearing a week earlier proves himself to be outrageously moronic. Everybody knew the GSE is overstated, using loopholes, in their asset situation (there was an article in Barron’s several months before) and that Paulson called the GSE’s to stay as they were was stupid, since he did not (could not) stick to it anyway. This guy has no guts and no balls. I have no idea how he ever got to be CEO of GS and who thought that he would be a good man for the Treasury (just because he had so many China entries in his passport)? LEH needed to be taken private in the last instance. Actually, they needed to force Fuld to sell or make sure to have sufficient equity after the BSC failure. Plus, he should have been forced to tell the truth about the risk exposure. Publicly, the CEO and the CFO’s lied and misled the public (which is a case for a class legal action since it’s obviously fraud). Sure, one could think it is a bit of credit for unchartered water, but since we saw this coming two years ago and, with common sense, plenty of hard situations could have been avoided. I do not give any margin for errors to this guy.

Sure, there is a lot of political pressure due to elections – but screw them and the lobbyists. It’s not so important who gets the presidency, since he will be screwed within two years and opposition will take over the legislative houses anyway. They are exchangable but not to drop the world into DEPRESSION is the priority. These guys work for the people and should act accordingly and not throw around populist statements and act cowardly. Bernake and Bush are hiding. In any case, the later one is soon fired by the nature of his job but Bernanke should admit that he can not handle it and step down as soon as markets are in smoother waters.

As for the technical situation, we are at the brink of a collapse and have dropped below the 1165 support in the SPX – well for 1-2 days that’s tolerable from a technical point of view, since at crucial spots exaggeration is the way it unfolds. The VIX got even to 37 now but in a crash scenario we could and will reach 50 levels (more likely at a later stage). TDCombo for XBD has a weekly 13 and daily 12, hence today counting a 13 – that should, with the fact that we are far below weekly Bollinger and other indicators, mark temp lows. The SPX has a daily Combo 11 and is a bit below the flag support at 1165 (which for 1-2 days is tolerable), idealy not for the weekly close though. A breakout gives a 200 SPX point magnitude target at 960/1000 roughly. My assumption is that we bounce back next week with a 60% probability. We had a fair deal of panic with Gold jumping 10% and T-Bills going close to 0 – which usually marks temp lows.

In a bigger perspective from an astrological point of view, the events are still horrifying since smaller planets have run over positions which bigger and more forceful planets will take in the next 2-3 years, hence what we see now is the small version of the things to come between Q3 2009 and 2012 only in bigger scale. But even with common sense as I did before by doing basic math, the SPX will drop below 600 but a retest of March 2003 is the mildest possible outcome (not likely). Even Greenspan has put it now into the perspective of a once-in-a-century event – only that he carries a big chunk of responsibility, since he allowed for the liberalization of banking rules and insane leverage with the mortgage products.

It’s also disappointing to hear Mr. Buffett making misleading calls like the one that the US market is at an value level 100 SPX points higher and terminating banking account insurance a week later – that’s a bit irresponsible. He starts to talk his book. He is heavily short Index puts, which have cost him last quarter $1.7 bil and this quarter will be more costly, but he owns quite some financial exposure from Moody’s over AMEX to BOA and Wells Fargo. He has taken huge hits on the financials and the Index puts. They are European style though and only can be settled at expiration, hence between 2019 and 2027. His bet is that we are higher by then or the $4.5 bil. premium he received between 2005 and 2007 will have accrued returns, which can compensate and even offset the damage. The problem is that in a Japanese scenario with 0 interest and deflation, his bet would wipe him out. Lock in the money in a 20-year Treasury with 5% interest zero bond (reinvested interest), they turn out to be $13 bil. So on a $40 bil nominal exposure, he has a 33% protection plus the magnitude to the strike price (let’s assume 20% out of the money), he will be flat at half index values roughly, since we have no details on the deals.

Inflation is his friend in the sense of gravitation, since indices also get inflated. But sometimes, as in 1964 – 1982, with high inflation it’s the other way round because markets get lower multiplies, which is his foe.

excerpt from


Between 2005 and 1Q 2008 Berkshire Hathaway sold index put options totaling approximately $40bn notional amount, receiving almost $5bn in premium. These at-the-money options were written over the S&P500 and three international indices (most likely the FTSE100, EuroStoxx50 and Japan’s Nikkei or Topix – these are the most liquid indices for long dated options). The initial term of the options was either 15 or 20 years.

excerpt from


It’s not a surprise that Buffett is happy with the government’s bailout plan. Berkshire Hathaway’s portfolio is loaded with financial stocks: American Express (AXP), Bank of America (BAC), M&T Bank Corp. (MTB), SunTrust Banks (STI), and Wells Fargo (WFC).

Buffett’s Financial Stocks

Company Name


#of Shares Berkshire Hathaway Owns

(as of 6/30/08)

$ Value of Shares

(as of 9/10/08)

American Express




Bank of America




M & T Bank Corp.




SunTrust Bank




Wells Fargo & Co.






excerpt from Reuters


Buffett said Berkshire has written 54 derivative contracts requiring payouts if some high-yield bonds default between now and 2013. He said Berkshire has received $3.2 billion of premiums and paid out $472 million, a number he said is certain to rise. The maximum further loss is $4.7 billion, he said.


~ by behindthematrix on September 18, 2008.

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