Shortly after launching Sixth Man Research I became convinced that something catastrophic was going to happen. The global financial system was teetering on the knife edge of collapse and only a smattering of people had the freedom to imagine the magnitude and gravitas of it all.
July 19, 2007
Get Out of the Way; The Game Is Over
The end of the credit cycle has already happened; all that is left is handicapping the rate and effect of its decline.
The game can no longer be rigged; we have just entered the “every man for himself” stage.
What began as cooperation between intermediaries, has devolved into direct and hostile competition.
Every investment bank, private equity fund, hedge fund, insurance company, .et .al is on their own; they must navigate the waters alone.
Everything is fair game; there are no natural bids at the prices that have been prevailing for the past year or two and the Street is caught; BIG time.
Even if the infamous “Plunge Protection Team” were to agree on coordinated action, there is no way to control all the institutions around the globe that were sold now busted CDOs, all the hedge funds that are NOW in great distress, the “vanilla” institutions that will be forced to liquidate downgraded “AAA” securities, or even the ratings agencies who must seriously consider their legal liabilities.
Russian roulette has started. In an interview with Sandler O’Neil a few months ago, a senior Goldman Sachs partners said (and I paraphrase) “the first player to see the end of the cycle first will suffer the least damage; the penalties will balloon the slower you are to react.”
As this dynamic unfolds, collateral values will continue to fall, “Alt-A” delinquencies will usurp subprime headlines, and the distressed market will be flooded with worthless marginal credits.
This is a crash—in credit. If you believe equities can survive without the effervescent LBO bid, and if you really believe this sudden aversion to risk won’t impair economic expectations; God’s speed.
Market timing is an awful occupation; but risk management is a lost art. Manage your risk well.