Sit Tight

It's no secret the credit-market crisis starting with sub-prime mortgage is getting into a real problem for the whole economy and the market. To say it's only contained in the housing sector is like an ostrich hiding its head underneath the sand, it's wishful thinking at best. Bill Miller at the Legg Mason Capital Management pointed this out precisely:

"Credit markets are different. They are the source of liquidity to fund operations. If they are not
functioning, the economy is threatened. That is why the problems that began in US subprime but which have spread to encompass a wide swath of the mortgage market, as well as the commercial paper market, are so serious and have galvanized central banks and government financial authorities to move swiftly to try to restore those markets to normalcy."

There are two kinds of ostriches: the first kind would think what's happening in credit market doesn't impact the overall economy; the second kind would think the worst is already over or almost over. Both are somewhat based their belief from all kinds of economics report like inflation within range, jobless claim is ok, other part of economy seems strong, etc. Yet all these are data, i.e., old data, i.e., rear-view mirror.

To admit the credit crisis to be a big problem requires some high-level reasoning. What Xie has posted in his blog reminds me something I read about two years ago, someone said that the next financial crisis will come from the derivatives because so few people understand them and so huge the market for it. Xie puts out a simple but powerful fact: the total value of derivative market is 400 trillion dollars, roughly three times as the value of the original securities. That's equivalent to say, each dollar worth of securities has been traded three times as much. This is a pyramid up-side-down. This is exactly why if someone bought a house using a sub-prime mortgage for, say paying $1000 per month, and find himself/herself cannot pay the monthly mortgage on time, the down-stream impact is much more than the just $1000 becoming default.

Anyway, back to what I originally want to write. What we should do right now is probably sit tight till the storm is over. This inevitably would present both risks and opportunities. The bargains could come from banks and housing stocks. After all, people should have belief we still need banks and we still need houses.

BAC may present itself as a great opportunity in this crisis. Compared to other banks and investment banks, BAC may prove itself more stable on a more traditional model and less aggressive investing.

LEH is a well deversified company and may position better in the investment bank industry.

I feel lucky to have chosen AAPL half year ago as my primary holding. AAPL has no debt (matter of fact it has too much cash) and thus expose no risk of financing when borrowing cost inevitably rise. The stock will be impacted by general market for sure, but that only gives more opportunities to increase positions.