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Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Stock Market Relief Rally Following US Fed Rogue Trader Rate Cut

News_Letter / Financial Markets Jan 28, 2008 - 05:47 PM GMT

By: Nadeem_Walayat

News_Letter

Rogue Trader 2008 - By Thursday of last week, the Monday / Tuesday sell off in European exchanges was increasingly being blamed on the unwinding of positions held by Societe Generale's 31 year old Rogue Trader named Jerome Kerviel.

The amount of exposure that the trader had committed the bank, Societe Generale to is extraordinary at some $60 billions, which is more than twice the value of the bank. After positions were unwound on the quiet so as to avert more major panic selling, the net loss to the bank is some $7.1 billions, this is on top of the $2 billions of losses on US subprime exposure.


The Market Oracle Newsletter
January 28th , 2008            Issue #5 Vol. 2


Dear Registered Member,

Rogue Trader 2008 - By Thursday of last week, the Monday / Tuesday sell off in European exchanges was increasingly being blamed on the unwinding of positions held by Societe Generale's 31 year old Rogue Trader named Jerome Kerviel.

The amount of exposure that the trader had committed the bank, Societe Generale to is extraordinary at some $60 billions, which is more than twice the value of the bank. After positions were unwound on the quiet so as to avert more major panic selling, the net loss to the bank is some $7.1 billions, this is on top of the $2 billions of losses on US subprime exposure.

The key error was the failure to offset positions in both directions and thereby result in relatively small net risk i.e. following the hedge fund formula of being net neutral where both longs and shorts cancel each other out. But, unfortunately for Societe Generale, there new star trader FAILED to hedge his long positions and hence the net exposure of $60 billions and realised losses of $ 7.1 billions.

Damage was also done to France as one of its few globally successful financial institutions was brought to its knees.

Speculation extended to the extent that the US Fed cut interest rates in response to the market turmoil ignited by the Soc Gen selling.

My opinion is that the Fed had already decided on cutting interest rates by 0.75% at the next meeting, and that they did respond to the apparently accelerating meltdown without clear explanation as to why the meltdown was occurring at this point in time. Thus the cut prior to Wall Streets opening on Tuesday to bring forward the decision by just over a week.

The question now is will the Fed cut rates again on Wednesday this week ? and if so by how much ?

The money markets are leaning towards a further 0.5% cut this week which will take the Fed Funds rate down to 3%.

The loss exposes the amount of risks banks the world over are running as derivatives books have exploded in recent years to an estimated as high as $450 trillion. The exposures are far in excess of the value of institutions therefore mistakes and oversights such as failing to hedge longs against shorts can literally bring some of the biggest banks to the brink of bankruptcy.

An already weak banking sector therefore now suffers some more loss of confidence.

In Wednesday mornings Special Newsletter mailing, I indicated that the markets were likely to bounce following the rate cut, and so they have attempted to do so but under very high volatility, whilst Europe and Asia were weak today, the US managed to recoup earlier losses by the close suggesting that the relief rally 'should' continue this week.

Once the market decides the bounce is over, the next to watch will be the quality of the inevitable retest of last weeks lows, which will indicate the strength or weakness of stock market sentiment going forward for several months.

Last Chance to Gain FREE ACCESS! to the Guru of Elliott Wave Theory, Robert Prechter's premium services as published for the month of January. Times up at Mid-day EST 30th Jan 08,

All the best for the rest of the week.

Nadeem Walayat,
Editor of The Market Oracle

In This Issue
  1. US Government Rescue Plan is Too Little Too Late as the Liquidity Bubbles Burst
  2. Stock Market Rally Expected to Continue
  3. Stock Market Bounce - SELL The Rallies!
  4. Fed Duped by Rogue Trader and the Destruction of Bond Insurers
  5. Stock Market Investors Running With the Herd
  6. Stocks Secular Bear Market
  7. Technology and Consumer Staples Investing Themes 2008: A Tale of Two Halves - Part3
  8. Credit Crisis to Escalate as Mortgage Bond Market Losses to Pass $3 Trillions!
  9. The US Debt and Yen Carry Trade Unwinding Time Bomb is About to Explode!
  10. UK Interest Rate 2008 Forecast Cuts to 4.75% by September 2008
1. US Government Rescue Plan is Too Little Too Late as the Liquidity Bubbles Burst

By: Money_and_Markets

For politicians, the government's $150 billion stimulus package is a no-brainer. But for investors, it's a bomb that could greatly intensify the flood of disasters now unfolding. In my open letter below, I explain why. And in the days ahead, we will give you step-by-step instructions for an ark of protection that would make Noah proud. — Martin

Read Article

2. Stock Market Rally Expected to Continue

By: Andre_Gratian

Current position of the Market

SPX: Long-term trend - Election years that fall in the 8th year of the Decennial pattern call for consolidation in the early part of the year followed by a strong finish. But the 6-yr cycle which is scheduled to bottom in late Summer/early Fall could play a restraining role, followed by an eventual bull market top in 2009-2010.

SPX: Intermediate trend - an extended intermediate-term consolidation is in process.

Read Article

3. Stock Market Bounce - SELL The Rallies!

By: Money_and_Markets

While stock investors are celebrating late last weeks surprise rally in the Dow, most bond investors are bracing themselves for a new disaster of unquantifiable dimensions.

Ground zero of the new crisis: Precisely the companies that I said would be at ground zero — collapsing bond insurers like MBIA and Ambac, along with the hundreds of thousands of bonds they cover.

Read Article

4. Fed Duped by Rogue Trader and the Destruction of Bond Insurers

By: John_Mauldin

  • What Does the Fed Really Know?
  • Fed's Folly: Fooled by Flawed Futures?
  • Brother, Can You Spare a Billion?
  • $5 Billion a Quarter
  • Planes, Trains, and Santa Barbara
  • And Charlie Wilson's War

It had been my original intention to devote this week's letter to the view from Europe, as I have been here for the last week, but events have changed that goal. The Federal Reserve made a very rare inter-meeting rate cut of 75 basis points this week, after the worldwide markets were in turmoil.

Read Article

5. Stock Market Investors Running With the Herd

By: Roger_Conrad

Running with the herd certainly beats trying to run against it—and getting trampled in the process. But it comes with a cost: surrendering your own common sense for “group think” that often makes no real sense at all.

As I pointed out last week, the character of the Wall Street herd has changed remarkably over the past two decades. Back in the 1980s, individual investors still accounted for the majority of stock ownership. Today, trading is squarely in the hands of big institutions and those who run them.

Read Article

6. Stocks Secular Bear Market

Zeal_LLC

Back in early October when the benchmark S&P 500 stock index was hitting all-time highs, “bear” was a heretical four-letter word. Merely letting it roll off your tongue or spill from your pen offered a fast track to pariah status. In the best of times, people tend to forget that the worst of times are even possible anymore.

But after the most brutal new-year selloff in market history, investors and speculators are far more receptive to the usually taboo topic of stock bears. Most on Wall Street consider a bear market a 20% decline from the latest interim high. This week we came pretty darned close to a 20% slide in S&P 500 (SPX) terms.

Read Article

7. Technology and Consumer Staples Investing Themes 2008: A Tale of Two Halves - Part3

By: Hans_Wagner

The beginning of a new year is a good time to make a new assessment of the important investment drivers and themes for the year. If you want to beat the market it is important to understand what is driving the markets and where are the best sectors to find good opportunities. By identifying these factors you will have a solid framework to assess the impact market movements and news events on your investment strategy. This is the third of a five part series on the outlook for the 2008 markets. The first part discussed the key drivers ending with a mention of what sectors will benefit and those that will be hurt. Part 2 reviewed the outlook for the energy and financials sectors.

Read Article

8. Credit Crisis to Escalate as Mortgage Bond Market Losses to Pass $3 Trillions!

By: Jim_Willie_CB

Bankers, Wall Street hucksters, financial network commentators, and floating analysts seem to have flunked basic arithmetic in grand fashion. Maybe they only expose the next link in a long chain of deception, their apparent expertise. One hears estimates of $200 billion on total mortgage bond losses from the Secy of Inflation Ben Bernanke. One witnesses the series of bond writedowns by Wall Street banks. One can read of Wall Street economists like Jan Hatzius of Goldman Sachs, who cites $400 billion in potential bond losses, a favorite figure cited by other bankers. One is subjected to press anchors and their simplistic echoes of bond losses. One is endlessly lectured by highbrow analysts of the extent of bond damage. The trouble is, they all cannot do simple arithmetic and observe the billboards on mortgage bond indexes, fully available.

Read Article

9. The US Debt and Yen Carry Trade Unwinding Time Bomb is About to Explode!

By: Christopher_Laird

Synthetic Dollar Short - Richard Russell and other gold writers talked about a ‘synthetic dollar short' based on debt in 04/5. The thesis is that overly indebted entities will face a day when their loans are called in, and the demand for dollars will rise dramatically, as assets are liquidated to pay off positions/debt.

The often discussed Yen carry trade has a similar mechanism, where lots of Yen have been borrowed for the last 10 years and invested in various markets that yield more than the half percent Japanese interest rates. Big and small investors have taken advantage of this more or less free money, riding the interest rate bonus with little risk – up to now.

Read Article

10. UK Interest Rate 2008 Forecast Cuts to 4.75% by September 2008

By: Nadeem_Walayat

The US Fed's emergency 0.75% interest rate cut to 3.5% following the global stock market plunge on fears of a looming US recession now increases the probability of a near certain cut in UK interest rates at the February MPC Meeting, rather than at the originally forecast March MPC meeting. Whilst the US has made deep cuts in interest rates from a peak of 5.25% to 3.5%, the UK has only cut rates by 0.25% from a peak of 5.75% to 5.50% with the expected February cut to take rates to 5.25%.

Read Article

 

For more indepth analysis on the financial markets make sure to visit the Market Oracle on a regular basis.

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