A Forex View From Afar

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Are Banks A Good Bet? Part II

Written by A Forex View From Afar on Tuesday, July 29, 2008

After what we saw in the last day, a big No would be the answer. This article comes on top of the first part (although we didn't expected yesterday to happen so soon!).

Merrill Lynch had just announced it will sell $8.5 billion of stock and liquidate $30.6 billion of bonds in order to maintain its credit rating. The selling would go like this: $30.6bn CDOs sold to Lone Star for $6.7bn. That is the equivalent of 22 cents for every dollar (the word cheap is not enough to describe this transactions). In order for Lone Star fund to buy the Super Senior CDO, this is true, Merrill lent them $5bn. Again, Merrill lent $5bn to a fund so that the fund could buy assets worth of $6.7. Practically, Merrill gave away $30.6bn of paper for $1.7bn.

Within all of this we see that Merrill has quite a interesting background. This is Merrill's sixth write-down, after they said repeatedly there is no need to for additional capital, and that there would not be any other write-downs. Bank write-downs have reached $40bn at this stage. Last week, Merrill announced earnings, giving no signs as they would want to sell stocks or bonds. Usually the decision to sell assets would have been announced last week, with the earnings. The apparent reason was Merrill had only just taken the decision this week. Now we only have to find someone who could actually believe that a $6b loan on $30b of paper was thrown together over the weekend.

Anyway, Merrill is off by 55% this year. If they continue this way, the road is open for more losses, but at least they gave a sorely needed boost to the glass half full equity traders, and that fed itself nicely into Usd strength.

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There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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