I wish I did not had to choose this topic for my blog, but that is not going to change the sad reality that’s out there! On breakdown of 12k level on dow we have taken a quick 1000 point drop as I had feared in my previous blog here two weeks ago. What is amazing is that even this 1000 point drop is hiding a lot of ugliness in wall street. The 8% or so drop in dow is nothing in comparison to the hit financials stocks have taken in last few days. These stocks are down ranging anywhere from 25% to a mind blowing 70% in just couple of days- notable examples being the government supported Freddie Mac (FNM) and Fannie Mae (FRE) and Lehman Brothers (LEH). LEH dropped from $22 to $14 in matter of two days, this too after having been consistently selling off for the last three months. At this rate, one wonders, is the end really near for Freddie Mac, Fennie Mae and Lehman? Bear Stern in the making? Actually some in the media are calling it “Bear Stearn squared” given that the total mortgage backed by Freddie Mac and Fannie Mae is of the order of 5 Trillion dollars, any government sponsored bail out plan will further put the US government in deep deficit, potentially killing the US dollar further and rasing the interest rates. Actually the US bond markets also sold off fiercely on Frinday fearing a downgrade of US givernment debt from a AAA rating (source-Bloomberg)!

The Friday sell off started after a report form New York Times the previous evening that the governemnt is thinking of nationalizing the two entities (FNM and FRE) and share holders are likely to lose all their equity( read share prices will go to zero). The stocks opened 40- 45% down next morning after being down 25% the previous few days. The investors got clobbered, including yours truly:-(

I had a decision to make on the financial stocks I had in my portfolio, hold or dump? With the help of options I had been able to hedge my exposure to certain extent, but 45% down in a day, my relatively simpler hedging in place is not designed to handle that kind of volaitility! Unless you forego all your upside potential as well, you can not create a hundred percent hedged poortfolio(Of course there are delta neutral strategies also but these require constant adjustment in the protfolio to make sure you stay delta neutral all the time, unfortunately I do not have that kind of time required to adjust my portfolio so frequently).. Later in the day the government ( read Treasury Secretary Paulson) denied the rumors and the stocks did recover some lost ground. I did what a sound money management program required me to do, I dumped half my portfolio on the bounce, stayed with half, so that if their is any upside I can still participate, but if they tank further, my exposure gets limited. No easy answers here.

I have seen liquidations in commodities, speculative high PE tech stocks, index futures, but not in so called value stocks- financials trading in PE mulitple of 4,5 and run by the top notch-know it all- ivy league investment bankers- that has to be a first! Really taken by surprise, a nasty surprise! Next time I get a solicitation for joining a class action law suit against these guys, guess what- I am going to join!

In the markets you never stop learning and that is why I like the markets! So old and yet so new, always changing, always challenging! Some characters in the market never go away, particulalrly the fear and greed element (and also hope which could be a disasterous thing in the markets, some stocks just never come back, think Enron and WorldCom). Right now there’s fear, there’s panic, but somewhere there is hidden opportunity as well. My job as a investor is to find that!Yep, the market has thrown a challenge, yes I am hurting in the short term, but it will go away in few days, I will get up and be back in the saddle! As they say what doesn’t break you, makes you stronger! I hope I ( and all my fellow investors) emerge out stronger after this crises in the credit markets and yes don’t forget “this too shall pass“!!

>
I wish I did not had to choose this topic for my blog, but that is not going to change the sad reality that’s out there! On breakdown of 12k level on dow we have taken a quick 1000 point drop as I had feared in my previous blog here two weeks ago. What is amazing is that even this 1000 point drop is hiding a lot of ugliness in wall street. The 8% or so drop in dow is nothing in comparison to the hit financials stocks have taken in last few days. These stocks are down ranging anywhere from 25% to a mind blowing 70% in just couple of days- notable examples being the government supported Freddie Mac (FNM) and Fannie Mae (FRE) and Lehman Brothers (LEH). LEH dropped from $22 to $14 in matter of two days, this too after having been consistently selling off for the last three months. At this rate, one wonders, is the end really near for Freddie Mac, Fennie Mae and Lehman? Bear Stern in the making? Actually some in the media are calling it “Bear Stearn squared” given that the total mortgage backed by Freddie Mac and Fannie Mae is of the order of 5 Trillion dollars, any government sponsored bail out plan will further put the US government in deep deficit, potentially killing the US dollar further and rasing the interest rates. Actually the US bond markets also sold off fiercely on Frinday fearing a downgrade of US givernment debt from a AAA rating (source-Bloomberg)!

The Friday sell off started after a report form New York Times the previous evening that the governemnt is thinking of nationalizing the two entities (FNM and FRE) and share holders are likely to lose all their equity( read share prices will go to zero). The stocks opened 40- 45% down next morning after being down 25% the previous few days. The investors got clobbered, including yours truly:-(

I had a decision to make on the financial stocks I had in my portfolio, hold or dump? With the help of options I had been able to hedge my exposure to certain extent, but 45% down in a day, my relatively simpler hedging in place is not designed to handle that kind of volaitility! Unless you forego all your upside potential as well, you can not create a hundred percent hedged poortfolio(Of course there are delta neutral strategies also but these require constant adjustment in the protfolio to make sure you stay delta neutral all the time, unfortunately I do not have that kind of time required to adjust my portfolio so frequently).. Later in the day the government ( read Treasury Secretary Paulson) denied the rumors and the stocks did recover some lost ground. I did what a sound money management program required me to do, I dumped half my portfolio on the bounce, stayed with half, so that if their is any upside I can still participate, but if they tank further, my exposure gets limited. No easy answers here.

I have seen liquidations in commodities, speculative high PE tech stocks, index futures, but not in so called value stocks- financials trading in PE mulitple of 4,5 and run by the top notch-know it all- ivy league investment bankers- that has to be a first! Really taken by surprise, a nasty surprise! Next time I get a solicitation for joining a class action law suit against these guys, guess what- I am going to join!

In the markets you never stop learning and that is why I like the markets! So old and yet so new, always changing, always challenging! Some characters in the market never go away, particulalrly the fear and greed element (and also hope which could be a disasterous thing in the markets, some stocks just never come back, think Enron and WorldCom). Right now there’s fear, there’s panic, but somewhere there is hidden opportunity as well. My job as a investor is to find that!Yep, the market has thrown a challenge, yes I am hurting in the short term, but it will go away in few days, I will get up and be back in the saddle! As they say what doesn’t break you, makes you stronger! I hope I ( and all my fellow investors) emerge out stronger after this crises in the credit markets and yes don’t forget “this too shall pass“!!