Funnymental Comments

This is part of my commentary that I just sent out to subs.

Now, the governmental actions are a real mixed bag here, and hard to understand. What I understand fairly well is that the short sale ban in the financials was a bad idea. It does nothing to really help the situation and only calls the credibility of the market into question. I've actually heard pros talk about getting out of the business due to this action. They'll likely change their mind as this action is only temporary, but the fact that Cox thought it was a good move means that the leaders at the helm are ignorant of how our market really works. Now, steps to shore up money market funds is good. These are what bank deposits were in the 30's. Shore them up or watch the system grind to a halt and for a trillion dollars to go to money heaven. These funds need to be revamped a bit and policed long term (probably by someone other than the Feds), but near term, the Feds did the right thing there. The RTC-type bail-out of the bank' toxic mortgages is NOT a good idea. Just like RTC was a bad idea. There are a lot of bad mortgages. There's also a lot of salvageable value there, so long as there is an incentive to exploit it. If the Feds take that debt in, there will be no workable salvage possible and the value destruction will be far greater. The housing mess will go on and weigh on the markets for a decade. Certainly the Feds can play a role, but this is not the right one. So, plan on a cap for the market for some time. It's well above our heads, and we've probably got a floor below, too, but it's not a great time for Buy and hold.

I agree with you, the hyper-stagflation might fail even as it is proposed. This is what I sent to my partners;

It is a $700B rescue package, not an injection into the economy as much as it is absolutely necessary and it will happen more and more. This is on top of the nearly a trillion dollar default in the GSEs already. None of these are providing new liquidity unless the SWF come and buy in hundreds of billions in return immediately due to the investor protection, the domestic economy is not capable of self sustaining a bottom here, there is still a massive wealth destruction going on in the real estate.

Only a new wave of foreign investment large enough to offset the destruction can support the US markets at these levels and anything above 1300 would be still artificial in the near term (until the end of the year). My guess the market will hit a brick wall around 1280-1300. So, I believe the market is about to nose dive much faster within few weeks, most likely a crash is coming since the chances for something to go wrong from here is still exponentially higher than everything to work perfectly. It would be enough for a politician or central banker to say these will cause hyper-staginflation or the housing will be not be quite rescued or an outright opposition for the protection of the taxpayers etc etc...

So, I see not much to support for the markets after these rescues, the lawmakers are even debating how to let a rescue in the trillions happen here, yet it will take a lot more to bottom this market. The taxpayers do not have that kind of money to pay its interest, even if the foreigners accept to lend that kind of money in Q4 (trillions) and I am not even sure how much they really have in cash at this point to simply buy the bad debt. BTW, essentially the US gov't is telling SWFs to buy the US Treasuries so that the Fed can bail out the bad paper in the banks created in return of them buying the Treasuries only a few years ago, how fast do you guys think this bail out of their money with their own money can actually happen?!?

OTOH, if the world's central banks are going to print all at the same time in the weeks ahead and a bottom works out from here, it will come back to haunt the real estate and the equities in the form of hyper-staginflation since the commodity prices (based on the CRB) are still significantly higher than 2007 levels despite all of the deflation in every other asset class, still no real growth is in the horizon as far as a collective intervention of the central banks goes, but a gradual intervention on the way down such as these might be able to save the system from a total apocalypse...

Edited by arbman, 21 September 2008 - 02:46 PM.

The unspoken objective of this bailout package is to create a recession as opposed to a crash and subsequent depression. If you study the S&L crisis of the late 1980's you'll quickly see it, and it's disposition (RTC), helped lead to the recession of 1990-1991. We're currently not in a recession, but will be soon. The GOVT prays this package will act as RTC did, as bad as it was implemented, to cushion the shock of financial disaster.

U.F.O.

http://en.wikipedia....and_Loan_Crisis

Depressing thoughts for sure.
It seems like the deaths of Butch Cassidy & Sundance were imminent Thursday.
They may have dodged a bullet for now, but they are still on the run.

Did you see this one:

PAPER: ALMOST ARMAGEDDON; MARKETS WERE 500 TRADES FROM A MELTDOWN...

The market was 500 trades away from Armageddon on Thursday, traders inside two large custodial banks tell The Post.
Cracks started to show in money market accounts late Tuesday when shares in one fund, the Reserve Primary Fund - which touted itself as super safe - fell below the golden $1 a share level. It had purchased what it thought was safe Lehman bonds, never dreaming they could default - which they did 24 hours earlier when the 158-year-old investment bank filed Chapter 11.

By Wednesday, banks sensed a run on their accounts. They started stockpiling cash in anticipation of withdrawals.


By the close of business on Wednesday, $144.5 billion - a record - had been withdrawn. How much money was taken out of money market funds the prior week? Roughly $7.1 billion, according to AMG Data Services.

By Thursday, that level, fed by the incredible volume of sell orders pouring in from institutional investors like pension funds and sovereign funds, had grown to $100 billion. It was still not enough to stem the tidal wave.


Paulson knew the $105 billion injection was not a real solution. A broader, more radical answer was needed.

Hours after Paulson made his round of calls to calm the industry, word leaked out that an added $1 trillion bailout of banks was being readied. Investors cheered. At about 3 p.m., news of the plans was filtering up and down Wall Street, fueling a 700-point advance in the Dow Jones industrial average through 4 p.m. Friday.

Had the Treasury and Fed not quickly stepped into the fray that morning with a quick $105 billion injection of liquidity, the Dow could have collapsed to the 8,300-level - a 22 percent decline! - while the clang of the opening bell was still echoing around the cavernous exchange floor.

Again I might be totally wrong here, I've been wrong before, but this is the way I see it;

Why did the Fed and Treasury drain in the net total last week then?!? They added nothing as of Friday's close too, so we are in a bull market since Thursday? Why Paulson did absolutely nothing to support the Lehman brothers?

He openly discouraged everybody else (the private and central banks and large investors) from saving the company. It is perfectly normal to find out that these money market funds saw a few holes opened in their accounts by the failure of LEH.

I want to believe in these stories, but I believe in what I see in the numbers. I do not think the market was about to crash last Tue/Wed. I believe this was probably the most proactive market manipulation to wash out the short selling at the Sep expirations and create the most stunning reversal effect possible. So, the decline is still not over imho.

How about the trillion dollar bail outs? They had to happen anyway, but the timing is everything. There is an enormous illusion created right now as much as the reality weights on it...

But U.S. Treasury Secretary Henry Paulson adamantly opposed the government coming to Lehman's rescue - a stance that made it even more difficult for the investment bank to find a buyer to willing to roll the dice on a takeover. One of Lehman's potential buyers, Bank of America Corp., instead snapped up a rival firm, Merrill Lynch & Co., which had last year brought in a new CEO to purge many of its mortgage problems. (forbes)

Unfortunately Mark, you and Glokhan make total sense and very fortunately, articulated the situation and the aftermath well. U.F.O., you may be right but, the sheer size of this as well as the "Main St." issues which are still continuing, will make the pain of '90-'91, even '80-'82 seem minor in comparison. Alt-A resets are still not at their peak. Resets will go on for some time to come. Unemployment will breed more unemployment. It's a hard snowball to stop once it starts going downhill. Even if oil prices fall to where gas is around $3.00 a gal., it's still $3.00 a gal. Wages have not been going up to meet these issues and inflation has been climbing. Nontheless, in terms of trading the day, while I am not ready to throw in the towel like those Mark mentioned who, I assume, actually go to an office to do it everyday (although where they do it doesn't matter), I am unsure of what messing with basic rules, even in one sector and for a, supposedly at this point, set period of time does to markets. Do short traders move in concentration to the more vulnerable co's. in retail or homebuilders or more techs? What kind of confidence can traders and investors have in a "free market" that has always been a "rigged casino" during normal period when the umpires change basic rules of the game on a minutes' notice?

Edited by milbank, 21 September 2008 - 06:05 PM.

I agree milbank. This will be a big one for the record books. Most likely the largest recession in our lifetimes. U.F.O.

A way to help? Limit the use of computerized trade programs, at least stop the deliberate use of rapid streams of 100-500 share blocks to simulate panic (or euphoria). Its like pouring gasoline on a fire.

MILLBANK says................"inflation has been climbing" are you serious..please dont make definitive statements when the figures bear out disinflation and downright deflation in the services sector

Edited by BigBadBear, 21 September 2008 - 07:07 PM.

Mark I do not think that these guys are ignorant of how the markets work. I think that it is just the opposite. It looks to me that they are are very good at at TA and seem to use and have a very good understanding of Elliot Wave Theory. Their timing is just to perfect to be random. If you wanted to move the markets and get the most bang for your buck you could not have picked a better time to do it than Thursday. I think that they know that the short selling ban is a bad idea in the long run, but these guys do not care about the long run. All they care about right now is the public perception that they are on top of this situation and the rally on Thursday and Friday seems to have proved there point in the public's eye. The system is broken. Most traders know it and they know it. They are just trying to save as many of there elite friends a$$ and theirs too at the expense of the average joe taxpayer as usual. These guys are not ignorant, they are very smart thieves stealing more money than we have ever seen before.