Geithner Outlines 'Resolution Authority'

Business week posted an article on Geithner's legislation proposal and outlined what 'Resolution Authority' is actually being requested. The article is referenced below.

'The goal of the proposal is to give the government better tools to handle the failure of giant and deeply intertwined financial firms like insurance behemoth American International Group (AIG) and banking titan Citigroup (C)—companies'

The key phrase being 'like AIG and Citigroup' . Will this fate soon fall upon AIG and Citigroup themselves?

'The proposal would also effectively shift some authority now held by the judiciary to the executive branch in an effort to speed up what could otherwise be slow-moving bankruptcy proceedings.'

When 'Resolution Authority' is applied, what effect will this have on effected financial institutions?

The last section in the article called 'Preventing Firestorms', talks about stemming systemic risk.

Ultimately, if this legislation is passed, I feel that the US government will have the ability to ultimately say, 'We have the necessary tools in place to prevent big institutions, who are too big to fail, from failing'. Systemic risk is exactly the failure of any of these type of institutions. The legislation proposes a US government mandated controlled bankruptcy, where all creditors and debtors expeditiously renegotiate terms of existing debt.

Will this even pass? How will the contracts be renegotiated? Will effected financial institutions sue the US government for full values of their contracts?

This 'Resolution Authority' is unconstitutional, and too vague. If the government did have this power for AIG and Lehman, what would AIG and Lehman look like now?

FAZ is now the play.

Please share your thoughts and predictions below.

http://www.businessweek.com/bwdaily/dnflash/content/mar2009/db20090325_426418.htm?chan=top+news_top+news+index+-+temp_top+story

Investing in FAZ and FAS (continued)

After watching the market rally on Geithner's plan, I looked for some details on the plan and some possibilities that the bears might begin to show their teeth again.

I ended up reading a post on SeekingAlpha (referenced below). That had some logical reasonings and views that will chime with investors on the short side of the financials. But even so with all this logical reasoning in place, we have to inject US Treasury and Federal Reserve policy into our models when investing in FAZ and FAS.

Let me be the first to say, that I have so far lost money investing in FAZ and FAS (10%) and am posting what I have learned playing FAZ and FAS over the last few months, hopefully to the benefit of others.

First, technical analysis is out the window as the performance of these funds have huge swing days on reactions to the news reporting US Treasury and Federal Reserve Policy on the economy. As for all I know, there is no such technical analysis model that takes the news into account. The valuations of financials in the future is all speculative and much more volatile than any other index right now.

Second, do not bet on market corrections. After large market swings on a trading day, buying the inverse fund is NOT a sure bet. Supplement, your reasoning for buying the inverse fund with something other than a market correction. You may get caught on the wrong side of the train.

Third, know the tools that the US Treasury and Federal Reserve have left at their disposal and bet on public perception, not necessarily your own belief. I maintain the position that these funds are leveraged and are for taking advantage of huge swing periods, not to hold long on your personal beliefs.

Over the last year, the US Treasury and Federal Reserve have timed their agendas and dissemination of information on policy and tools to effectively manipulate public perception on the market. The more you understand these tools, which tools are left at their disposal, and what effect on public perception these tools may have, the position becomes an issue of timing.

Last, I would like to begin the comment section on:

• What tools and policies the US Treasury and Federal Reserve have at their disposal
• When such tools would be deployed


• The intended effect on public perception to valuations of the financials the tool or policy will have.

Hopefully, your comments will provide some insight on smart investing strategies in FAZ and FAS.


Referenced Article:
http://seekingalpha.com/article/127558-the-high-dividend-stock-investor-s-collapsing-dollar-survival-guide-part-6a?source=yahoo

Investing in FAZ (Financial Bear 3x) and FAS (Financial Bull 3x)

As I became more interested in investing in FAZ and FAS, I first looked at all the posts in the forums and tried to filter out all the "trolling" and it seems to me that many don't understand what they are investing in.

This blog takes attempts to take out all the noise and attempts to look at the numbers objectively, to try and develop an investment strategy in FAZ or FAS. I'm doing this research myself, so thought I'd share it and post it in other forums to help people figure out the maze.

First the introduction, FAZ and FAS are 3X leveraged ETF's that track the Russell 1000 Financial Services (RGS) Index.

LEVERAGE
The first thing to note about these ETF's is the leverage. The leverage for these funds is at 3x. There are other ETF's tracking indexes leveraged 2x and other's that are not leveraged at all. The key here is to understand what "leverage" exactly means? Does it mean that for every 1% change in the index, leads to a 3% change in the price of funds? I wasn't too sure and plenty of the forums in these funds elude to buyer beware messages. So let's crunch the numbers and see exactly what it means. (Click the graph)


The first thing to note is that the ETF's inception date was November 7 and if we had bought both funds and held onto it til the present date, we would of lost a great deal on both sides of the coin. As of December 12:

• RIFIN.X (-14.5%)
• FAZ (-39.7%)
• FAS (-53.81%)
  

By looking at the names of Finanacial Bull 3x and Financial Bear 3x alone, you might expect the following performance of funds in the funds with the RIFIN.x losing 14.5% since inception:

• RIFIN.X (-14.5%)
• FAZ (33.5%)
• FAS (-33.5%)

However, that is not the math that these funds are following and it is actually contained within their prospectus. If you have not viewed the prospectus, I highly recommend that you do.

So let's look at the following hypothetical scenario to try and explain what it means to be 3x leveraged and try to explain the above scenario.

So as we see, ultimately, that over time, this fund will lose you money. It gets increasingly more difficult for these funds to get back even, even more so as the RIFIN.X fluctuates up and down. People holding this fund for over 3 days need to keep reading.

STRATEGY FOR PLAYING FAZ OR FAS
Holders beware, do not hold this for over a day in your portfolio for the reasons stated above. This ETF is for day traders only, who can take advantage of a volatile swing in the index in less than 24 hours. There is no reason to hold FAZ or FAS, because ultimately you are betting on multiple day bear or bull rallies. It's a slippery slope, but most of it is downhill if you hold.

On the google forums, fjordl...@gmail.com posted a spreadsheet with FAS and FAZ prices along side the RIFIN.X prices, to illustrate how FAZ and FAS are priced.

http://spreadsheets.google.com/ccc?key=peyWe3CKKO3vpdyZuto56bQ

If you have any questions about this, just fill out a comment below and I'll get back to you.

FINANCIAL BEAR 3X (Public, NYSE:FAZ)

Don't think the economy is doing well? Think that it will get worse? There is a fund out there for bears to sink their teeth into the market, tripling down their bet on the further decline of financial and capital markets.

I'm bullish on financial bear, as I'll need to see one of three things to start selling off my holding:

• Unemployment rates decline.
• Foreclosure rates decline.
• Standard of living increase.

It recently ran to as high as 200 when news came out that Paulson would not use bailout money towards its original intention of buying troubled assets from financial firms and Citibank needed an additional cash infusion. Comboed with the indexes at their lows in late November, this fund ran hyper.

The next coming weeks this fund will see a decline, but this one could run through the same scenario, dependent on whether or not Congress will give Paulson the second half of this bailout.