GOIH Global Capital Markets: Negative Conexity Trade

Our quantitative finance group will dissect the Morgan Stanley trade and provide a layman's view of how the trade went astray. Had the trade been properly hedged via the ABX index it is likely the loss would have been a gain. As we reported here several weeks ago, the models being used on Wall Street are flawed and contain inflection points. Those in the know, know where the inflection points are located and move the market in that direction causing large losses for those who continue to use the flawed models premised on the normal distribution and the efficient market theory.

The Ph.D's at Morgan were no doubt trained in the classical theory of modern finance which is based on a false premise, i.e., that the market price are not correlated and are independently distributed. As can be clearly seen after the latest round of losses by the large investment banks, they obviously do not know how to operate the models correctly. Tallying the losses amounts to more than $30 billion to date that have been disclosed.

$30 billion in losses by what are supposed to be the smartest people in the world, GOIH models predicted the losses in Jan. 2007 and we see continued losses as long as the Fed continues to lower interest rates.

We believe there is a major Wall St. investment bank short the dollar against all the major currencies and the Fed's move is designed to rescue the banks from the losses in the subprime portfolio, otherwise it makes no economic sense for the dollar to continue to fall and for the Fed to continue to lower interest rates.