Another Sign That The Freefall May Decelerate

The comment below adds to our slightly diminished fear. As a result we're firming up our rebalancing stance: We're not going to actively move our equity allocation lower than 1/3, but instead will look for opportunities to raise our equity exposure over time, based on the parameters we laid out yesterday morning (mainly, waiting for true financial crisis in some emerging markets, and for more financial institutions to fail). We're remaining very patient in this regard, fully believing that systemic risk and a deep recession could linger for a couple of years.

One of the additional positives today is that the Lehman CDS auction may have gone "smoothly." Orderly markets are a necessary condition for reducing panic, especially when some participants previously feared chaos. This may bode well for inevitable future CDS auctions. From Marketwatch this afternoon:

• Similar auctions earlier this week to set the price of Fannie and Freddie debt were "messy," undermining confidence in the process, according to CreditSights, an independent fixed-income research firm.
• However, the Lehman auction Friday went "smoothly" and "efficiently," according to Robert Pickel, chief executive of the ISDA, which represents major dealers in the CDS market.
• Traders and other CDS market participants marked the fair value of their exposures and posted more collateral as Lehman's troubles increased, Pickel explained. This discipline means that sellers of protection should not have trouble paying to settle the contracts related to Lehman, he added.
• The result of the Lehman auction means sellers of CDS protection on the firm will need to pay 91.375 cents on the dollar to their counterparties.
• Roughly $400 billion will be paid out on Lehman CDS, but, once all positive and negative positions are "netted" out, about 2% of that money will actually change hands, Pickel estimated. Payments are due on Oct. 21 to settle Lehman CDS in cash, he said.