Here I come to save the day. Will speculators save the taxpayers in the greatest housing - economic - crisis since the great depression? The bottom line is that if we are to get out of this crisis it will be the market speculator that will rescue the economy once again.
One great speculator, or should we say investor, Warren Buffet, is already making his move putting in $5 billion dollars into Goldman Sachs essentially buying into that firm for cents on the dollar. Is Congress as wise as Warren Buffet by buying banks' bad paper? Or is Buffet just buying in now because he knows that the government is going to buy all of Goldman’s bad paper leaving the cream of the crop for his own picking? The truth is that like Buffet the government might be buying these securities at the right time. Despite the fact that there is a risk to Mr. Buffet and to the government that the price of these things could go down the truth is the odds are that the value behind these assets are more than worth the risk. The key thing is of course the transfer of risk that will be transferred from the holders of the paper to the government that eventually be transferred to market speculators that will eventually set the price. But the hard part is setting a price when you the tax payer are the only buyer.
Mr. Buffet is obviously more savvy than the government but the truth is the government is still getting a great deal even if they pay above the current market price for these “garbage securities” which is zero because they will be able to sell the assets in the future at the value price in the future. Of course the big question is what is a fair price to pay now? Ultimately in the short run the government is taking on huge risks but in the long run they will make a profit by reselling repackaged securities to speculators in the future. In the short run it looks like to government and the taxpayers are going to have to be the greatest speculator of them all but eventually the government is going to have to count on the speculators to bail out the economy again.
There will be a great transfer of risk as these securities are taken off the books of financial institutions. It looks like the treasury and the fed favor a reverse action. One bidder, you the taxpayer, and a number of institutions offer their securities at a price and the government would pay whatever the lowest bid is. Other options includes a fire sale that could cause more harm because the loss the institutions might take may inhibit them from making anymore loans. Or the government could make what they think is a fair price based on what these assets should be worth in the future.
We the taxpayers have the risk but also the profit potential down the road. Of course the best way for the government to transfer that risk is to auction these repackaged securities back to the market and the best way to do that is with the futures market. They need to sit down and figure what they have and sell these securities. The futures markets not only can trade the expected future value of these securities but a futures contract on when they should be sold and in what quantities.
This brings us back to the oil market. Oil is going to face it greatest fear and that today may be the supply report. It surged on a report that Kinder Morgan shut down its Texas oil terminal after a fire. Oil is at another key turning point. Today’s inventory report may be the key to the next direction the market takes. Inventories are at scary levels and if they are too scary we could run to 120. If not so scary we are headed back to 90. Long term bearish but we have to respect the charts and the market's concerns of tight supply over weakening demand.
Stand aside on oil. We may react after the report.
Buy November heating oil at 27000 - stop 26700.
We're short November RBOB from apprx 26500 - stop 27300.
Buy November natural gas at 740 - stop 720.
Have a GREAT day!
