Wall Street moves to Washington and the Uncle Sam Hedge Fund

September 29th, 2008  by Antony Ganzitti

Dow Jones up 121 @ 11143	NASDAQ down 3 @ 2183	Gold up 6.5 @ 888.5
Oil down 4.77 @ 106.77	FTSE down 109 @ 5089	Silver up .23 @  13.50
Copper up 21 @ 6926	Lead up 34 @ 1980	Zinc up 25 @ 1781
Aluminum up 31 @ 2462	Nickel up 225 @ 16950	Tin up 545 @ 18000

Wall Street moves to Washington and the Uncle Sam Hedge Fund

All eyes are still focused on the US at present and the proposed $700 billion bailout plan.  US lawmakers are nearing a vote, perhaps on Monday to create a mammoth government fund to buy bad debt and alleviate the financial crisis.  The sovereign wealth fund or more appropriately titled 'Uncle Sam's Hedge Fund' already has a swag of toxic assets in its portfolio, namely Fannie Mae, Freddie Mac, AIG, and Bear Stearns.  All the fund needs now is a little diversification, perhaps a fledgling airline stock, or an industrial behemoth like Ford or General Motors to add to the mix.  Taxpayers will be stoked that they are now investors in these failed business enterprises, with excellent balance sheets, strong earnings growth, and unmatched returns on equity…….. NOT!!

Another interesting point to consider also.  If this $700b deal gets the go ahead, the US will have a total national debt of over $11 trillion or $11,000 billion.  Strangely enough none of the credit ratings agencies have even flinched at the chance to downgrade the US Government and their treasury issues from the superior AAA rating which they carry.  These are the same agencies which allowed all these investment banks, insurance groups, and mortgage lenders access to cheap credit.  The likes of Standard & Poors, Moody's, and Fitch Ratings are liable to some extent for the problems being caused in the US.  The groups don't work for free, and some question the actual ethics behind their ratings.  Do firms who pay them a higher fee get a more attractive credit rating??  There is no watchdog to monitor these groups, and they are purely a 'pay for service' organisation.  Anyways, my point is that these companies are partly to blame for allowing debt instruments to be priced so cheaply and on a minimal risk basis, when in effect these were extremely risky products which should have been priced accordingly.

And how does this relate to the US government??  Simple, the AAA credit rating must come under question.  With huge credit concerns, rising unemployment, a floundering economy, enormous domestic and foreign debt, and various social issues, if this was any other country in question the rating would definitely be on the chopping board.  But this is the U.S. of A.  Keep watch of this space.  I question if these agencies would even have the nerve to downgrade the AAA rating.  Food for thought!

One more important issue to bring up from proceedings of the last week, and that is short-selling.  Last Monday, the ASX delayed the opening of the market by one hour pending the release of an important announcement by ASIC.  ASIC came out and said that it was placing a blanket ban on short-selling for one month.  However, short-selling has not been the catalyst for this most recent market decline.  Short-selling is a way to profit from falling share prices.  It adds liquidity and if done properly and in accordance with rules creates a market efficiency mechanism which benefits speculators, traders, and investors alike.  The reason so many people are against it is human nature, and the psychology and make-up of our mind.  People don't understand shorting and profiting from selling something you don't own.  People also are unable to register in their heads that prices can and do go down.  They can only look for 'long' buy signals, and when charts or fundamentals begin to turnaround people hold on for fear of missing out and because of the greed factor.  Thinking outside the square and away from the herd is something everyone needs to learn to become successful in the financial markets. 

Quote of the day: "If money isn't loosened up, this sucker could go down" George Bush on the $700 billion bailout plan.

Contact your Freeman Fox Stockbroker on 07 3031 9960 or 1800 003 369 Ext 7.

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