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Friday, February 22, 2008


the hard trade

there are positive noises emerging on the credit front from some sources. david merkel, for example:

Now we may have an opportunity as some CPDOs are forced to delever, credit spreads are being forced higher. I commented before (all too recently) that it was time to dip our toes into the waters of credit, and buy 25% of a full position, with carefully selected credits. I think it is now time to raise that allocation to 50%. It is time to begin taking some credit risks; spreads are discounting a lot of unfavorable future news, and it is time to take advantage of it. Is the current news gloomy? You bet, and I can tell you that at the end of many days in mid-2002, I would hold my head in my hands in disbelief at the carnage. But good credit investors must invest when the spreads are wide, and give up income when spreads are tight.

this backs the expressed view earlier stated at accrued interest that the high-yield market has priced in any likely recession. spreads across the credit default market have since continued to widen -- here is the investment grade picture, here the high yield.

i've posted repeatedly about how the equity market should turn if technical history is an indicator. but let there be no doubt -- i am scared. the animal within wants to sell. this is a very hard trade for me to hold.

jeff miller passed on today via the kirk report exerpts from an interview with william eckhardt.

"It's much easier to learn what you should do in trading than to do it. Good systems tend to violate normal human tendencies."

"There is a persistent overall tendency for equity to flow from the many to the few. In the long run, the majority loses. The implication for the trader is that to win you have to act like the minority. If you bring normal human habits and tendencies to trading, you'll gravitate toward the majority and inevitably lose."

there is a lot of fear in the market now with massive negative newsflow and i'm feeling some of it. it is easy to advise oneself that hanging on is not only the sane but even safe thing to do; but it is very hard to listen and take the advice.

if savvy investors are starting to wade back into the credit markets on the basis of heavy discounting, it could be that the credit market is on the brink of turning. when it does, the major worry in the equity market -- a credit market collapse -- will abate.

UPDATE: a massive late day reversal higher on news that a bank-led ambac bailout plan will be announced early next week.


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