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Thursday, March 20, 2008


global bank panic is over

how's that for duplicity?

as i wrote yesterday, i continue to believe that the second wave is coming.

as it manifests, smaller banks and particularly heavily-exposed midsized regional players will face a new set of threats emerging not from defaults in the residential and consumer lending aspects of their balance sheet -- elements which are in fact unusually small this go-round -- but the commerical real estate (CRE) and commerical and development (C&D) aspects, which are unusually large. i would not be surprised to see american regional banks at the epicenter of the next down leg in the financials as the realization of the nascent CRE bust becomes unavoidable on wall street and fuels fears of a deeper recession -- or worse.

but i also think dick bove of punk ziegel may be right. the last two days have seen (see here and here) dramatic spread tightening and a return of risk appetite in credit markets. it is beginning to be reflected in the credit default swap market in the form of contracting spreads. THAT IS IMPORTANT, if it continues, and bove is further saying that the investment banks have increasingly been able to find clearing prices in problem assets. that may be the critical sign that these banks, which have been in a nine-month hell of illiquidity, are starting to move beyond the "collateral crunch" having secured deep and radical intervention from the federal reserve.

this could be all wrong, to be sure. there could easily be a rapid return of risk aversion. but news like this in conjunction with the possibility that the market is indicating a relatively durable bottom is in place makes going long financials a much better risk-reward opportunity than at any point in the recent past. financials outperformed on tuesday and wednesday both, and are leading higher today as well, and strong curve flattening is underway again this morning.

part of me wants to wait for a gap fill in the IYF to 78.28 to get longer still in financials. but another part is not at all sure the index is coming back in the short term.

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