US Markets and the Poulson Bad Bank Strategy
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US Markets and the Poulson Bad Bank Strategy

US Markets and the Poulson Bad Bank Strategy


Trading Features / Strategies from Simon Denham of Capital Spreads.

It is nice to see that the ‘Sage of Omaha’ even has the power to halt an entire market move.

If I was sitting at my desk and was asked which bank in the world would I buy into, with any spare $8bn I happened to have lying around, I think that Goldman would be, pretty much, my first pick. The company has virtually no toxic/bad debt and has only been suffering in recent days due to its peers disappearing in a puff of smoke and the fact that even Goldman cannot conjure up money market funds in the current environment.

The effect has been to bounce the markets from the dire situation they found themselves in at the close of the US session last night. The Dow Jones had a series of attacks at 10825 and failed to penetrate the support but still traders had ended the day sitting just on the level.


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Notwithstanding the intervention of Warren Buffet the markets continue to look grim as more and more creepy crawlies are revealed as each stone is turned over. The speed of market reaction is getting increasingly extreme (especially now shorting in some very heavily weighted stock is restricted). The Dow Jones index is regularly trading in 100 to 200 point ranges in just a few minutes on no news whatsoever. The toss of a coin is not a good way to be trading the markets but you probably have as much chance of winning as following even the best strategies.

We still await the US Congress’s ratification of the framework of Mr Poulson’s Bad Bank strategy but law-makers are understandably a bit cautious of being seen to agree to such a huge increase in US government debt and its subsequent possible effect on the taxpayer. It is possible that some form of equity stake will be demanded from banks wishing to utilise the Sink Hole and this is likely to keep bank stocks weak until the small print has been checked out. The banks will have two stark choices, either struggle on over an indeterminate period slowly rebuilding your balance sheet (and still vulnerable to further downturns in the economy) but remain undiluted, or bung a whole load of toxic debt over to the Fed but give up a big slice of equity to the state. Neither of these is exactly a good scenario for shareholders.



The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.


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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.

Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.

'US Markets and the Poulson Bad Bank Strategy' edited by SD, updated 24-Sep-08



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