What we do instead is determine what drove us into this crisis and monitor these drivers for any signs of a turnaround. We private investors are in no hurry and we are prepared to wait it out for as long as it takes.

As readers of the Fleet Street Daily and Fleet Street Research well know, I am bearish on banks. So why am I always talking about them? Because they are a leading indicator of the credit crunch. Banks led this crisis on the way down, and it is my belief that they will tell us when this thing is over. It is a sentiment that has been reinforced by many a market sage, including the legendary fund manager Bill Miller.

There’s a short and a long answer for why banks are so influential. The short answer: Banks represents around 15% of the total cap of the FTSE 350 making it near impossible to really take off when one sixth of the whole market is anchored by bad debt and ill will.

Over the past year, the FTSE 350 has fallen nearly 8%. Stripping out the banking sector — which has fallen 32% — that performance would be 6% higher and at all-time highs.

The long(ish) answer centres on contagion and securitisation. Still there? OK…

1. All things financial flow through banks.
2. As some of those things seize up — like borrowing rates and appetite for structured products — everything starts to fold.
3. When these things fold it starts to hurt businesses in the real world — like estate agents and mortgage lenders — which knocks sentiment and we end up in a vicious cycle.

When the blueprints and foundations are in doubt, people start jumping out of buildings and this creates a lot of casualties. That’s where we are up to now. But things are starting to change. Policy makers are making positive noises, mortgage banks are lending to borrowers and the stock market isn’t that far off its peak.

And now we have another reason to be cheerful. HBOS, one of the worst afflicted banks of the ‘crunch, surprised the market with a further signal that the end may-not-be-nigh.

HBOS goes back to ‘backed

The UK’s largest mortgage lender stunned the market by announcing that it successfully sold off £500m of mortgage-backed bonds, the first deal of its kind for any major European bank since the credit crunch struck last summer.

The mortgage-backed market has been all-but-dead recently. The method that sets prices for the complex securitised products has been called into question by academics, regulators and market traders alike. A lack of trust, transparency and appetite are part of the reason banks have been writing-down pools of mortgage-backed assets that they’ve been unable to shift.

That any bank successfully managed to create and actually sell a new product shows there is life in the old dog yet.

This is the bank’s first deal since July 2007 and may spur belief among peers that mortgage securitisation markets are somewhere to put your money once again after months of inactivity.

It’s not the first time products have been securitised — the banks have been recycling their own mortgages for a long time — but these were retained either on the bank’s balance sheet or swapped for gilts with central banks rather than offered up for public consumption.

This is the latest in a series of upbeat indications. Last month, the Bank of England launched a series of schemes to encourage trading in the market and it seems to have paid off. Spreads on top mortgage bonds fell more than 50% against government debt, which is a good thing.

The bonds are backed by a bundle of mortgages with an average Loan-To-Value (LTV) ratio of 61%. The LTV is the loan amount expressed as a percentage of the appraised value of a property… a 20% cash deposit on a property works out as an LTV of 80%, i.e. 61% is top stuff.

Seven firms bought the loans, made up of banks and insurers and the bond is set to have an average life of nearly four years. An HBOS spokesman commented that it launched the issue on the back of investor demand: “This is a welcome first step but does not mean the floodgates have opened.”

What does this all mean?

We all know that it’s premature to call the bottom. No one has the capacity to fathom the further twists and turns this tale could take. Everyone who pretended they could, and told investors to buy banks, has been dead wrong so far.

Nonetheless, if we are looking at what could be the resurgence of the structured investment market, this is a major milestone for banks:

Structured products have been dead in the water. Renewed appetite could kick-off a spate of big money deals and these divisions in the banks might start pulling their weight and start pulling in some revenue.

It also suggests that we will be seeing fewer write-downs. If there is a market to sell the assets then these losses will be wiped from the balance sheet. By extension, it could mean that bank shares could stage a comeback from their low levels as one of the drivers of the credit crunch appears to be subsiding.

It’s important to note that this is all best-case scenario speculation… that feint sound of a bell ringing in your ears could get you in trouble. It is still not time to pile into banks. When you invest in things you don’t fully understand, you and your money can easily be parted. There may be further twists and turns in the banking saga, and given the amount of opportunities in the UK market that have nothing to do with banking, I don’t know why you’d put your money there.

For a free pack on the kind of opportunities you should be looking at, sign-up to
The Fleet Street Letter. We warned our readers of the credit crunch before it struck and our tips have helped readers to navigate these dangerous times.

Theo Casey

Source: Banks Under The Microscope

Ever since the market bounced back from GE’s nasty earnings miss, there’s been a sense that the buyers have more mojo than the sellers. That bullish mojo seemed to dry up Wednesday, suggesting angst over the Fed’s next move. But then came Thursday, and the bulls went all out. Friday was so-so, but the optimism endures.

Trades that have been working for a long time — energy, metals and so on — have temporarily reversed. Stuff that was beaten down — tech, financials, home builders and so on — have caught a strong bid.

So does that mean it’s time to reverse last week’s call for more pain in the financials? Is it time to embrace new upside there and change the game plan around?

Nope. Not unless the key facts have changed. The bottom line is, there’s a new hope jag in town… but the question is how long it will stick around.

Of course, you can make some good coin being long selective names. My friend Cash’s Blackstone pick, for example, is up about 20% from his recommended entry point as of this writing. (See previous Taipan Daily episode, “Cash Makes a Controversial Call.”) But on the whole, I’d still rather be on the sidelines in financials (waiting for a reversal) than long them.

It’s also interesting to note that financial stocks, in rally mode, are approaching their 50-week moving average from below. Meanwhile gold and silver, in correction mode, are approaching their 50-week MA from above.

The 50-week MA could act like a ceiling in regard to the financials. For gold and silver, it could act like a floor. I suspect that, at some point soon, these markets will trade places and revert back to longer-term trend.

Why? Because underlying conditions haven’t changed all that much… and as Jesse Livermore once noted, the speculator’s greatest and truest allies are underlying conditions. Inflation is still a growing (and global) threat. Western banks are still coughing up hairballs. Consumer pain is still an early stage problem, in both the U.S. and Europe; the printing press still looms. Evidence on the ground hasn’t truly improved. The only thing that has, really, is Wall Street’s mood.

The Best Trading Book Ever Written

Speaking of Jesse Livermore there. Hopefully you’ve heard of him.

Livermore was a great trader in the early years of the 20th century. The book that tells his story, Reminiscences of a Stock Operator, is widely agreed to be the best trading book of all time. There are gems of insight on nearly every page. And though Reminiscences was first published in 1923, its wisdom applies today more than ever. (Technology has advanced since then, but human nature not a whit.)

If you haven’t read Reminiscences and have no interest in trading, then that’s fine. If you do have an interest in trading, however — or even just the least bit of curiosity — then by all means run, do not walk, to get your hands on a copy of this book.

The author of the book is a man named Edwin Lefevre. (Livermore told his story to Lefevre, a professional writer, who then turned it into a first-person narrative. The narrator in the book gives his name as “Larry Livingston.”) You can find a copy in your local bookstore, or on Amazon.com… or even free on the Internet. (The font isn’t all that appealing, but the book is available in PDF form here: http://www.scribd.com/doc/7923/Reminiscences-of-a-Stock-Operator)

For those not inclined to read the whole thing, I have a list of the top trading quotes and stories from the book. (I’ve read it multiple times, and compiled the list years ago.) It’s a pretty long list, but not as long as the 250 or so pages.

Since the text has passed into public domain, I imagine it would be okay to post that list on the Taipan Web site — but only if enough folks are interested. (If that sounds good to you, send an e-mail to (taipan@taipanpublishinggroup.com) with something like “Livermore quotes” in the subject line.)

This is the quote that came to mind most recently:

[The successful trader] must not only observe accurately but remember at all times what he has observed. He cannot bet on the unreasonable or the unexpected, however strong his personal convictions may be about man’s unreasonableness or however certain he may feel that the unexpected happens very frequently. He must bet always on probabilities — that is, try to anticipate them.

I call this “playing the odds game.” It means being aware of reward to risk, being aware of the chances (or “odds”) of an event happening, and combining those two things in an effort to make good trading decisions.

Oftentimes, playing the odds game means passing up a trading opportunity — even if it looks tempting in the short term. A healthy respect for probability means thinking about risk as much as reward; that in turn means thinking how a trade might play out if it were reenacted not just once or twice, but a hundred or even a thousand times.