Are we recovered yet?

Marketplace Staff Mar 2, 2007

Are we recovered yet?

Marketplace Staff Mar 2, 2007


BOB MOON: Time for our look at what was, without a doubt, one of the most painful weeks on Wall Street in many a year. Let’s find out if our business analyst and stockbroker, David Johnson, has survived at all in Dallas. You still breathing out there, David?

DAVID JOHNSON: I’m still breathing. And I’m beginning to answer phones again and not make anybody open my mail before I do. I’ll be all right.

MOON: Ever the optimist though. What point does this go from being a simple correction to being serious bloodletting?

JOHNSON: Monday morning, at about 10 a.m. . . .

MOON: (Laughs) Check your watch huh . . .

JOHNSON: No I’m serious! Here’s the deal: we tanked today, and you knew we were going to tank today. Because traders don’t want to own stocks going into the weekend. We’ve got all these rumors of things that could happen. I mean there’re rumors about a sub-prime lender that’s in deep trouble, or a bank in trouble, or a hedge fund in trouble. Or . . . you know, the Kerry trade could continue to unwind . . .

MOON: H-hold, hold on, hold up here. Carry trade – I saw that mentioned today, I tried to read about it but I couldn’t figure it out. What’s the Carry trade?

JOHNSON: The Carry trade is really an enormous operation. It’s very legitimate. It does a lot of good, believe it or not, but it also can be very risky. Here, simply . . . let’s say that there’s an SNL on one corner, and there’s a bank right across the street on the other corner. OK, so you go into the SNL, and you borrow money. They’ll loan you some money for 4 percent, OK? Walk across the street, and you buy a CD at the bank, and they pay you 4.5 percent.

MOON: So you’ve made a half a percent.

JOHNSON: Exactly! Exactly. Now: if you like that, let me tell you how it could be a lot better. You could go to Japan, and you know how low their interest rates are.

MOON: Almost zero.

JOHNSON: Exactly. And in fact, it’s a half a percent. You could borrow money for 0.5 percent, get an airplane, fly to the United States, buy U.S. treasuries, get 4.5 percent on your money. So you’re borrowing at 0.5 percent, and you’re getting 4.5 percent . . .

MOON: So what’s the worry?

JOHNSON: Here’s the worry: because in Japan, they don’t really loan you dollars. That’s not their currency. It’s yen, OK. So they’re gonna give you yen, and some time during your flight, you’re gonna have to exchange it for dollars. And then, someday you’re gonna have to pay the Japanese back. And you’re gonna have to take your dollars and convert it into yen. Easy enough, right?

MOON: Right.

JOHNSON: But here’s the problem. The currency doesn’t stay put. It keeps moving around. And what’s been happening is the yen has been getting stronger against the dollar. So it takes more dollars to buy the yen. So at some point, you’re not making 4, you’re making 3.5 or you’re making 3. Or you’re losing your shirt, big time. And that’s the concern.

MOON: OK. With all those concerns flying around out there, what’s to keep the market from just racheting right on down?

JOHNSON: Well, nothing. I mean I . . . except that there’s just a staggering amount of money setting on the sideline waiting for an opportunity to come in. And corporate America still seems to be making a lot of money. I don’t think it’s over . . . overnight, but I think it’s probably sooner than later.

MOON: So what you’re saying is, we just need a big infusion.

JOHNSON: We need a three-day weekend.

MOON: (Laughs) OK. Thanks. David Johnson in Dallas.

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