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Registered Investment Adviser Caleb Lawrence

The major averages enter the final hour with modest gains on generally better than expected, but not overly significant data. Factory Orders increased 1.2% in August on strength in Durable Goods. The proxy for business spending non-defense capital goods ex-aircraft gained a respectable 1.1%.

The Trade Deficit slipped 1.3 billion in August to 42.4 billion as exports increased .8 billion and imports slipped .4 billion. Oddly enough the hurricanes are rapidly going from huge disasters to economically insignificant, becoming just another item to be ignored. The world works in mysterious ways or so I have been told.

The primary catalyst for the last crisis was the originate to syndicate model pursued by the banks. In a nutshell they issued mortgages to just about anyone, almost no questions asked and then turned around and packaged these loans into Mortgaged Backed Securities or MBS, aka Collateralized Mortgage Obligations or CMO’s. Slapped an investment grade credit rating on them, for a small fee, and sold them far and wide. Fast forward to the present and we have corporate backed leveraged loans, covenant lite Collateralized Loan Obligations or CLO’s. These instruments have surged in popularity of late and look to surpass the record 534 billion issued in 2007. Incidentally the history of structured finance that involves “C something O” in its name has been by and large a history of fiascoes and financial crisis. Also of late another structured finance product that featured prominently in the last crisis synthetic collateralized debt obligations are also making a comeback. Record debt, increasingly creative forms of finance and near record asset prices that are far higher than that seen in 2007, what could possibly go wrong as investors sleepwalk into risk lulled by the constant mainstream media mantra of “new record highs” and “record low volatility”.


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