Maybe I'm Amazed

In my 22 years on Wall Street, 20 years in fixed income. I am continually amazed that the repeated mistakes made by investors, traders and strategists alike. I am not referring to the repeating of mistakes of the distant past, but of the recent (if not immediate) past. Let us go back to the thrilling days of yesteryear, or at least 1999.

The setting is a retail fixed income trading desk in early 1999. I am having a conversation with our very knowledgeable and intelligent head U.S. treasury trader. We are discussing the tech boom (soon to be called a bubble). Investors are purchasing shares of tech companies which have no business plan and little hope of turning a profit. My government trader colleague tells me that people believe in the new economy. Unfortunately for these investors, the new economy was still subject to old math. Investors learned that profit matters and asset prices do not move eternally higher.

As if the tech bubble never happened, U.S. consumers, investors, traders and strategists came to believe that home prices would move eternally higher and interest rates would always remain low. Sorry, that is not true either.

Now we have the usual suspects telling us that commodities, especially food and oil will keep rising, even if the dollar strengthens (which won't happen according to these voices). Welcome to the new bubble. Once the Fed tightens as it should, the dollar will strengthen, oil will fall and investors will panic, accentuating he price decline of commodities. This will happen. The only unknown is the timing.

Another case of not knowing the past involves BAC and CFC. Last Friday, BAC stated that it may not explicitly guarantee CFC debt. This sent investors into a tizzy and caused an embarrassed S&P (which stated that it believed that BAC was going to take CFC debt onto its balance sheet) to spitefully downgrade CFC dent (Moody's left CFC unchanged on a positive watch.

It is de riguer for subsidiaries and parents to guarantee only their own debt. This is true of banks, utilities, and telecom. JPM and Bear are different as Bear is not going to live on as a subsidiary, but be absorbed into JPM.

This is not bad news for CFC bondholders. CFC will be upgraded if and when the deal is closed (BAC announced that the deal is a go). It will probably warrant a single A rating once BAC infuses cash and restructures CFC's business. Single A should be good enough for any CFC bondholder.