Monday, September 22, 2008

There is no free lunch

So finally, the US govt has done what it should have done a year ago, but which is politically not feasible till a few companies blow up. The way brokerages and AIG fell last week resembled a bank run by depositors - only that the run was by shareholders, which made capital raising prohibitively expensive.

There are a few things that one can bet on right now:

a) Tax rates are going up in US. Somebody needs to finance the bailouts, and it is the tax-payers. So buy muni-bonds. This ain't a free lunch.

b) Earnings estimates are high now simply because corporate tax rates next year are going to be higher than this year. So forget $90 S&P EPS estimate. Be happy if we see $75.

c) Debt issued by financial sector companies is now a great place to invest, particulary with the US govt stepping in as a buyer in the credit market. If this enables the financial companies to clear their balance sheets and raise equity from marketplace, debt holders can really benefit.

d) The impact on dollar is unclear. Any other country, and I would have said short the currency. But because this is the US, and dollar has the safe haven status, I dont know what happens here. If there is a run on the dollar, it will become a bad nightmare.

e) Because the direction of dollar is unclear, the direction of commodities is unclear. Buying gold might not be a bad option after all right now. If the world loses faith in the dollar, gold can go up 2x-3x easily. All the Indian grandmothers will have a smirk on their face at that time - for they would think thet figured this out sitting in the homes while the high flying financiers on Wall Street got bankrupt.

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