Rallying for all the wrong reasons - beware of Easter profittaking

The Easter break is here with all kids home from school. Spend yesterday with my kids as well as trying to sort out house builder issues. Will go Easter skiing tommorrow. The blogupdates will then resume on the 14th of April.



* The already "old" IMF suggestion of Euroisation of the CEE area
The IMF report calling for the Euroisation of the CEE countries was written a month ago. It is very interesting in that it provides some insight as to how desperate the IMF must have been at that point in time. It seems they were very much so. Introducing the Euro to hardcurrency debt, weak economic infrastructure countries, some of which currently apply fixed exchange rate regimes, will not be a solution.

- Most local currencies would have to devalue pre entry to the Euro anyway - then what? Locked into yet another fixed currency exchange rate regime. Admittedly with a floating currency, but not adaptable to any specific countrys fundamentals. The economic infrastructure issues and high leverage debt would not go away post an Euro entry.
-It would most likely seal the fate of the Euro as the eurozone is halfsinking as it is, already full with overleveraged, and massive amounts of toxic assets. Bringing on whole countries ready to sink will not help keeping the Euro ship afloat,,,,
- Admittedly, many of the CEE toxic loans will hit western european banks anyway since they have provided the credit. However, including the CEE into the Eurozone would just make things even worse.

Besides, I strongly doubt the ECB will change their mind and allow it. Post G20, the initial feelgood factor is strong enough to make this a non issue - for now. Have a feeling it will resurface before long though, as the European crisis has just begun. It will take a massive manipulation, fudging and fraud to postpone that development.


* As I mentioned on 3 April, I am joining the bullish herd - for the wrong reasons
Risks are building up with governments now increasingly applying the Martingale system. Drastically increasing the systematic risks, betting the economic turn will soon take place. It must, or else,,, For now, the market likes it - a lot. A classic, sharp, bearmarket rally.
Short term gain - long term pain.


*What is the US Treasury doing? Increasing the risks.
Lets look back. What has been the consensus on what created this mess in the first place? Too much leverage, repackaging "toxic" assets and selling them off to third parties, with the taxpayers taking the final risk.

So, any new measures from the governments surely must include some deleveraging, mark to market and accounting stringency directives? Ehhh, no. Instead, the US government has instead made sure the upcoming auctions of "toxic" assets will be leveraged directly by the taxpayers in order for the prices bid at the auction getting closer to the fudged, out of bounds asset valuations on the US banks balancesheets.

Investors not being approved for US taxpayerfinancing at the upcoming Geithner auctions have made clear they will not participate since they will not be able to get taxpayerfinanced leverage. The approved bidders have made clear that with the six times leverage from taxpayers, they will be able to bid three times higher than they otherwise would have. With the adjusted US FASB rules, the US banks will be able to adjust the 1Q results accordingly. Expect very good 1Q results from the US banks, especially on the writedownside. Its all government approved accounting "fraud" though. Hopefully investors will not be fooled.

The big risk is that Europe will follow and do something similar.
It is all one big gamble on the economies turning up. Then the fudging could continue, hampering growth in the process. If it doesnt, sooner or later losses will have to be realised. Problem is, by then, they would have grown into monstrous proportions. Especially if one looks at the difference between accounted and real value, ie book value vs market value.

Which brings me back to why the financial institutions problems got so much worse in the first place; lack of mark to market procedures; lack of riskmanagement procedures. Without mark to market procedures, it becomes quite difficult to generate the most efficient riskmanagement structure.

Admittedly, this was all approved by controlling authorities. this, however, it is not really an excuse for the financial institutions. Look at GS, they imposed the mark to market approach themselves, and they have by far had the most efficient riskmanagement of their toxic assets. They simply got rid of them as they started souring. Why didnt other institutions do the same thing then?

Well, some were probably unaware of what was taking place, as it did not show up in their results. Others identified it, but were prohibited by their management to sell as the discrepancy between booked value and market price would have caused severe losses. By definition, the riskmanagement strategy post it would have been a "fingers crossed" strategy.

The logic conclusion is that most of the current boards of financial institutions with great loss incurring assets on their books should go. As long as they stay put, it will be quite hard to get an efficient solution to the current "toxic" and bad asset dilemma. This is applicable globally.



*Beware of pre Easter profittaking
With the fierce bull run up to Easter, I expect some pre Easter profittaking to take place.
I have tried to find something more to buy, but have decided to stay on the sidelines, since I doubt this is the time and the place. Besides, 1Q results are coming up, and it will be interesting to see how they fall out, and, especially, how the market reacts to these results. Re US banks, I expect very good results. Especially with the FASB fudging now solidly in place and applicable to 1Q results. I am keeping a close eye on Brent Oil and a basket of US banks.


*Gold below important support levels
My Gold bear case seems to be about to take place with the Gold price moving below important support levels. Next stop should be in the 840/860 area, looking for the 810 level within the next week and a half. I expect choppy price action with rally attempts along the way.



*Position changes
-I have taken profit on my remaining part of Ivanhoe Goldmines, IVN. The whole position is now replaced with Call options, protecting profits.
-I am still long gamma in my other positions, looking for some sharp stop loss movements pre Easter.
- I have taken profit on one third of my short Gold options position, locking in profit.


As usual, good luck



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