Will Falsettos Become Castratos?

Before I get to today's post, I would like to thank all readers who said such nice things about my writing in the comment section yesterday.
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Following the Fed's rate cut, the talk on the Street is now "full speed ahead, we're going to bust right through the old highs and then.. The Moon". With the exception of some greyhairs, the rest of the chorus is simultaneously hitting those forced, falsetto high-C's that can pop eardrums. If you aren't familiar with musical terms, falsetto may also be described as "shrill". More on that later, opera fans...

To use Mr. Secretary Paulson's jargon, risk is being repriced, alright - down. Spreads for the CDX, LCDX and other such credit risk indexes are sharply lower and volatility as measured by the VIX index is also plunging. Bullish percentage on various stock indexes is fast retracing to pre-crisis levels: for example BPSPX, a bullishness measure for the S&P 500 index is nearing 65% after hitting 31% in August (it was 75% in mid-July).

The reason, sing the falsettos, is the kindest cut of all (those 50 bp's) that revealed the existence of the Bernanke Put to go with the existing Paulson Put. Two puts naturally provide an order of magnitude more juju magic against loss. It's like a sub-prime CDO tranche structure: if the Paulson Put fails, the Bernanke put takes over. "They won't ever let the market ever go down, tra-la-laaaaaaa-eeeiiii." I have a Monty Python-esque image of a bunch of Vikings chanting "Spam, Spam, Spammity-Spaaaam... "

Does anyone really believe this operetta? Oh, yes... There are plenty of newly-minted, cash-rich but naive speculators out there, all thumping their chests at the high-roller tables. Look no further than the Chinese, the Indians and all of the Petroleans. Plenty of fast bucks, little market experience and a whole army of western "advisors". Spam, indeed.

Who do you think has been buying most of those structured finance products leveraged 20x, eh? Who has been shoveling fresh money to the hedge funds and private equity funds? It wasn't Americans or Germans, I can tell you that much. I know one guy from the above national group, whose name you have NEVER heard and isn't even a household name in his own country, who walked into a private equity fund and plunked down $200 million. Leveraged at a minimum 5x the fund created a cool $1 billion buying power. The gentleman is not a fool - he is a legitimate, successful businessman who simply knows very little about financial markets, i.e. how the serious unloading takes place precisely after a major break, when the chorus sings "buying opportunity" all the loudest.

My hair - whatever is left of it, anyway - is greying nicely, in a rather attractive and distinguished way (end of advertisement), so I am one of the very few left singing in the lower register. No longer only on fundamental grounds, but also because of the old saying: "The bull climbs a wall of worry". If that worry disappears, as it is rapidly doing now, that's the time to start worrying. And if it gets replaced with certainty, particularly amongst those youngish operatic Wall Street falsettos striving to extend their natural singing range, their customers may very well accommodate them by turning them into castratos - if their predictions turn out wrong.

Have a lovely week-end.