As much as it personally and financially troubles me to say this; I told you so.  Recall my previous postings about the Subprime meltdown and the impending equity correction.  I saw this current disaster in the making.  Being a Japadamus sometimes is a difficult trait, you know something is about to happen but its hard to figure out what the proper defense is.  In this financial scenario, I moved many of assets into cash and sold a lot of my riskier assets (Indian stocks, Japanese Equities, Eastern European stocks, vanilla S&P 500 ETF,  Biotech) and tried to move into more defensive trades (long oil, long gold, long healthcare, long value stocks, long dividend heavy ETFs)  How did I fare?  I still got smoked! less than the S&P 500, but much more than I expected.  So it just goes to show you that being right and making money are too different things. 

Where does the market go now?  I think we need to see how the latest actions by the Fed are digested in the market.  Its true that this stealth easing helps create more liquidity and eases some of the credit crunch, but we also must remember a few things. 

1.  Only banks may avail themselves of this increased liquidity via the Fed Discount Window, so this increased liquidity doesn’t necessarily mean that Hedge Funds, mortgage originators, real estate investment companies are all going to see some flexibility in their capital requirements.  All this move does is assuage fears that there won’t be a run on the banks, but there is no incentive for banks, now with increased liquidity to turn a blind eye to their borrower’s risky behavior. 

2.  A lot of the recent market worries relate to an investment called “The Yen Carry Trade“   We are still seeing major moves in the dollar/yen exchange rate.  As the yen strengthens, more US investors have to unwind themselves of this trade by selling dollar denominated assets (equities, bonds, real estate) and repay the Yen denominated loans they borrowed in Japan. We can expect this behavior to continue unless the Yen begins to weaken against the dollar for some other macro reason.

3.  Risk will still need to be repriced.  We’ve seen the volatility index (VIX) spike to one of the highest levels in several years due to market jitters.  Where volatility eventually stabilizes is going to determine where riskier assets are priced.  Until we know what the real discount rate of risk (equity premium) is in the market, we can only guess if we are paying too much or too little for any “risky” asset.  It very well may be that the market decides to just step away from all risky assets until we have more information.

 For now I’m for the most part staying on the sidelines.  I may make some purchases of some biotech names that I think are at an interesting price, other than that we need to look to the market to tell us what to do next.  Also stay tuned for an all financial blog coming soon!