Blair Freedom Day: -3.
Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
Last week several major holders of collateral from the rapidly sinking Bear Stearns hedge funds, found out what LTCM learnt almost a decade earlier, when a one-way bet goes wrong it goes wrong for all the other market participants simultaneously. In the race for cash, after the few plums and cherries are sold off, all the rest is illiquid junk with virtually no buyers at all. Why, because no one can tell what part of a CDO pool may be real, what part was fraudulent all along, and what greater damage is still too come from yet more defaults ahead. In effect, why take a risk and buy now when, if we’re lucky enough to be around at this time next year, even the best collateral may be picked up for pennies on the dollar.
Sophisticated Bear Stearns has gone in a week, from having virtually no capital at risk in the faltering hedge funds, to having $3.2 billion of its capital on the line, with legitimate doubts now about the ability of Bear Sterns to survive if the bailout fails due to continued market events far beyond BS’s control. Having just seen the future of a lock up in the liquidation process, wise investors will start to pull money out of other non involved hedge funds, before the system faces a lock up later in the year. Below, prestigious Bank of America thinks we’re only at the tip of the iceberg. Who am I to disagree. Time to get safely back to cash. I will be liquidating this week, all but my holdings in Derek oil and Gas, Quaterra Resources and MacMillan Gold. It is not that the other companies don’t have very real merit, I just want for now to carry only NAFTA energy and precious metals companies.