Today the equity markets sold off, allegedly because of heightened inflation fears due to PPI numbers. These frightened investors were said to purchase U.S. treasuries, including long-dated U.S. treasuries. So we had the unusual phenomenon of long term yields falling due to inflation fears. This truly indicates that investor fear is driving the markets, at least in part.
It was fear and T. Boone Pickens which drove oil prices. Mr. Pickens predicted oil at $150 per barrel by next year. It was just three months ago that he predicted oil at $85. My how his book has changed.
I did a conference call with a branch office of a major investment firm. Again, the question came up asking when CDO prices recover, will firms take writeups. Many people mistakenly believe that CDOs are simply backed by subprime mortgages which will recover when the economy recovers. Not true.
Many (most) CDOs are backed, not just by mortgages, but by credit cards, auto loans, LBO loans, other CDOs and just about any piece of garbage that could have been squeezed into them. Some were "synthetic" CDOs backed by credit default swaps. These vehicles may eventually trade at better levels (some are not trading at all), but I have a better chance of becoming Queen of England than many CDOs have of trading at par or paying off to make investors whole.
Oppenheimer's Meredith Whitney predicted further writedowns and more pain for the financial sector. She will be proven correct. Not only will financial firms take more asset writedowns, but they will take charges making allegedly sophisticated investors whole for hedge fund investments which went sour. Too much bailing out and not enough accountability for my tastes. However, this is America in an election year. Everyone is a victim and no one gets hurt.
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