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Thursday, 21 February 2008

Whoever Heard Of A Risqué Virgin?

Whoever Heard Of A Risqué Virgin?

It was that hour between the FTSE cash closing and FTSE futures closing and I was bored. I don’t trade that hour, it’s too illiquid and can cost you a days earnings if you aren’t careful. So I did what I normally do and checked my emails, deleting the adverts and out of date stuff - as you do.

Then suddenly there she was, just sitting amongst the junk At first I got no more than a coy look, a fleeting glance of the beauty that was inside. I couldn’t resist. Gently hovering the mouse I slowly, gently pressed the open button.

Inside I found so much more than I had hoped. Gone was that coy expression, replaced now by that knowing smile and provocative pose. Here is her picture:

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So I did the only thing I could. I wandered over to her and asked “how good are your low risk bond and gilt assets”?

The reply astounded me. “Look here” she said.

Full listing of corporate bonds

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Yes, this very day I had been offered a smile from “damaged goods”. I ran my eyes over the assets and began to feel a cold sweat break out on my upper lip. Did she not realize how much she was exposing? Or was it a further come on? I started counting, 1,2,3 4, ………25,26…….52, 53…...60. I estimate about 60 of the company bonds listed were either Insurance, Banks, Broker/banks, Re-insurers or Finance companies. Out of 100, a 60% exposure to the shakiest sectors in the markets where the potential for more shocks looms large.

No wonder she looked risqué. Now I’m not saying all these companies are going to fold but let’s face some facts here. Credit and credit markets have had a heart attack and the liquidity pump is stuttering, requiring Fed administer defibrillation via the TAF. Signs of the heart disease are spreading into the corporate bond market.

She saw my distress and wandered over, draped an arm over my shoulder and whispered these soothing words into my ear:

“We put the security of your capital first

One of the basic rules of investment is that risk and return go hand in hand. At Virgin Money we recognise that to customers investing in a fixed-interest fund, the security of your capital is as important as a steady return on your money.

Our investment approach aims to strike the right balance, by only investing your cash in top-rated corporate bonds with highly creditworthy and well-known companies from Europe and the UK, plus a range of government gilts, which are at the safest end of the spectrum for fixed interest investments.”

She opened her dainty purse and pulled out a snapshot of the family.

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It was time to put this lady right. As attractive as her family was, it was time to show her a snapshot from my creaking wallet.

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She recoiled in disgust - a sneer spreading across her face. I’m not surprised, it is an ugly shot. I hadn’t finished with her yet, it was time to make sure she understood I wasn’t interested. So I administered the coup de grace. Using one of her own corporate bond issuers to thrust home the blade:

“Morgan Stanley's interest rates strategist Jim Caron explains why seemingly high quality AAA assets are getting hit so hard currently. "Because leverage is not available and one cannot achieve the required returns on higher quality (tighter spread) product without massive amounts of leverage," Caron says. "No leverage, no trade!" The current crisis situation is now about liquidity and leverage not credit evaluations. "Remember, the financiers of risk and the wardens of fair value were levered fast money players whose lifelines were tied to cheap money and gobs of leverage," Caron says. Unleveraged, real money was pushed out of the way. But now, without leverage, this has all changed. Caron concludes, "the Fed needs to cut rates a lot and fast and keep rates lower for longer. The aim is to increase Net Interest Margins(NIM) significantly in order to reliquify banks (a.k.a. the new old liquidity/leverage providers). Inflation potential is soaring and the curves will steepen much further."

Turning on her heel, she goaded me about my performance and pulled out a picture that showed “I’d never match this”:

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Laughing, she said she “enjoyed an average return of over 5.22% a year”

I turned my back on her and walked away.

She staggered away toward the deleted files bin, unable to comprehend the turn of events. I shouted after her “Risk in this market isn’t alleviated by a “pat” sales pitch. If you’re selling hot wares disguised as a “good thing” you better make sure the punter fully understands. Hey, if you want that kind of performance you could go to Northern Rock”

Market Snippets

FED REACT: ABN AMRO strategist Dustin Reid says FOMC minutes have "a clear bias unfolding whereby the Fed is more and more actively targeting the downside growth risks. This is going to have many in the market concerned about Fed credibility going forward - especially after this morning's higher than expected headline and core CPI numbers." (my emphasis)

US DATA: Jan CPI +0.4%, core +0.3% (unrounded +0.3106%), both higher than expected and bad for bonds. Apparel was +0.4% (NSA -2.1%), airfares +0.8%, drugs +0.7%, tobacco +1.1%, and hotels +1.1% -- most of which seem to be start-of-yr postings of higher book prices in non-necessities that might not hold. OER at +0.3% is worrisome as it marks a 3rd month of +0.3%. YOY CPI was +4.3% (highest since Sept '05) and YOY core was +2.5% (was also +2.5% in Feb-07, proving the point of bad seasonals).Food was +0.7% as poultry, fruits and veg soared. Energy was +0.7% as jumps in fuel oil and gasoline offset dips in electricity and nat gas.(my emphasis)

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