ManyPeaks.com

Bear markets are tough to trade. You obviously want to participate on the short side, but until Bernanke cut rates 1.25% over 8 days last month, I was always concerned about the high risk of being heavily short overnight.. and walking into my office one morning to the disaster of seeing S&P futures up 2-4% on a huge surprise cut.

Now, barring calamity, Bernanke & Co are presumably on hold until the March 18th scheduled meeting.

Thus, I now see the the biggest risk for a quick & massive displacement in the market to be on the downside — primarily based on these pesky bond insurers Ambac (ABK) and MBIA (MBI). Run, don’t walk, to read this very detailed letter to the two largest ratings agencies (S&P and Moody’s) from activist investor Bill Ackman, manager of the $1.6 billion Pershing Square Capital hedge fund. He intelligently and completely destroys the concept that these two firms should possibly retain their now-nonsensical AAA ratings. His points all make sense to me in this lopsided debate.

Deutsche Bank’s CEO likened the potential fallout from bond insurer bankruptcies as equal to that we’ve already experienced from subprime mortgages. So of course the raters are likely under extreme pressure from various beureaucrats not to “pull the plug”.. but I work on the assumption that reality eventually wins. It’s no shock why reality is being suspended. The question is, for how long.

Update: I almost forgot.. According to Bloomberg, gigantic multiline insurer AIG announced a “material weakness'’ in how the company valued a big chunk of its portfolio. The sad saga continues.