Ponzi Schema

The ponzi schema is destined to fail if there is no new money coming.  So, if an individual tried this schema, sooner or later, he will face the justice in the court of law.  Now, what if the ponzi schema is started by every major financial institutions world wide, what will be the consequence?  well, for the time being, we get a mess called subprime crisis but no individual get punished.

In a nutshell, the investment firms sell the shares for the mortgage, the same firms  also use borrowed money (leverage) to buy those shares. Since so much money poured into those shares, the market raise, the profit looks good for those firms and enable them to borrow even more to buy those shares.   When those shares stop to rise because home owner cannot pay the monthly payment, the share price started to fail, then, the investment firms has to sell shares  to meet margin calls which cause the share price to drop even more..  thus, the credit crunch...

So, what has this to do with current market then? this is because the so called "great de-leverage" is still going on,  meaning, there are still firms need to sell their shares to raise money to pay their debt.

Last week's FED decision to allow investment banks (before only commerial banks ) to borrow directly from FED is thus a great help to stabilize the market.  Since those investment firms can raise money from FED (eventually from tax payers ) and need not to sell more assets..  It is no wonder we have a exuberant market last Thursday even we are facing a longer weekend and Option expiration..

What about week ahead then?  If there is no surprise, we believe we could see yet another positive week.

1). We may finally can say bye to the lows set two weeks ago in the short term, this is becuase selling presure will subside due to FED's action.

2). Knowing FED is behind market 100% definitely take the "fear preimun" out the market, so, the market deserve a "fair value" :)

3). The collapse of commodities and other emerging market will divert those money back to a "safer"  us equity market.

4). The quarter end window dressing by mutual funds.

Of course, this does not mean we are entering into a bull market.  more realistically, we may enter into a trading range between 12000-127500 in near term.  

Also, VIX is still high, so, this is still a jittery market, I would still take profit if I can.  this is no buy and hold unless your horizon is 6 months from now.

A "SHORT" idea:

The TLT enjoyed a good run because its presumed "safe" status.  but with inflation running 3-4% and yield only 4%, we are basically assume "zero" real returns for a long term. Can this last long?  of  course not, thus, the next soft spot maybe in the treasure


Ok, good luck for the new week