Financial topics

[xakzen]

I too was fortunate enough to find this site in 2007 and it has saved much of my retirement money (for now). I have had some success trading the market with puts & shorts, but the government is constantly changing the rules against these positions. I agree with John & the deflation topics above. This is primarily why the government is acting against the decline of stock prices and will (unfortunately) continue. I agree that they are scared because according to everything Ben & the other Monetarist believe that it is impossible the deflation continues in spite of their efforts. I don't need to go into why this is true. Just read John's excellent treatise on the topic here on this site.

As far as the latest rally and all the cheer leading in the financial press, it is just a massive short squeeze that will eventually reverse in the direction of the tread down. I too am astonished by the magnitude and duration of the rally; but ask yourself, "Have the fundamentals really changed that much?" I believe not because of the arguments put forward on this site and some of the wonderful links to other sites found on this forum (Thanks for the Forum, John!). If we are to be successful trading in this environment, we have to recognize that there are serious risks involved not the least of which being that we are betting against the government's plan to re-inflate the bubble. They seem bound and determined to try everything including nationalizing the entire economy which may include our 401(k)'s & trading accounts. As in any risk taking venture always allow for some margin and don't bet the whole farm on a single trade and always keep some reserve for times like this when things don't go your way.

I am truly saddened by this turn of events and am not simply trying to "profit" from these times; but rather survive them with my family intact while maintaining some standard of living. I full expect that soon shorting stock will be demonized and outlawed in a vain attempt to stop the mean reversion, but like 1932 it will not stop the market from returning to the really value of these securities. Good luck.

[freddyv]

I read the following on Mish's Global Economic Trend Analysis today:

"Richard Koo is particularly good at pointing out that the monetarist Emperor has no clothes. Cutting interest rates to zero in post-bubble Japan had little impact because in a balance sheet recession, when companies are determined to pay down debt to stay alive, they will not borrow at any price."

I can attest to that because I am a business owner and even though my business is doing better than last year and is quite profitable I am doing everything I can to make sure I have cash available to survive a rainy day and to pay off ALL of my debt.

--Fred

[freddyv]

Sharp rallies are very common in Bear markets. From my point of view DOW 8,000 is now the resistance. If Dow breaks through 8,000 and then establishes a new low above 8,000 we could see a sustained intermediate term rally. But, I agree with John and others here--the long term is down--and, the second leg down, to come, should be spectacular.

Bill

I have to admit to a certain fascination with all of this. I often watch things unfold with a sense of looking at an old newsreel with history being played out for my viewing pleasure, though it's often not pleasurable.

One thing that is interesting is how people are learning as they go. The move from 7,500 to under 5,000 is only 2,500 points and could happen in a single, typical leg down. But such a move would be ANOTHER devastation to investors and would literally alter their sense of reality just a bit more. This is what I argued with John about before; that the "crash" is happening now, as we watch and it doesn't have to be all at once. Either way it will be devastating but if it happens slow investors will keep getting sucked in and hurt over and over again.

People are still trying to convince themselves that earnings or P/E's don't really matter or that it's okay that we broke through the 2002 lows or that Citi REALLY is okay all of a sudden and that housing HAS bottomed. All of this tells me we are far from the bottom and now I actually believe we may see a Dow as low as 1,200 given how far from reality we still are.

Another interesting learning moment was watching Jim Cramer on The Daily show get grilled in a way that 60 Minutes would have been proud of. Jon Stewart roped Cramer in with questions and then showed a video that PROVED Cramer was lying to him. At one point I just had to turn it off because I am was so embarrassed for Cramer but then I realized what I was seeing: the process by which people learn that it is not okay to screw your fellow man for a fast buck, if only because you might get caught and exposed on national TV. But I doubt that Cramer will change. I am hoping he will be off the TV soon and someone who has some integrity will replace him. IMO he has completely disgraced CNBC or at least the few quality people they have there.

--Fred

[John]

Dear Fred,

> One thing that is interesting is how people are learning as they
> go. The move from 7,500 to under 5,000 is only 2,500 points and
> could happen in a single, typical leg down. But such a move would
> be ANOTHER devastation to investors and would literally alter
> their sense of reality just a bit more. This is what I argued with
> John about before; that the "crash" is happening now, as we watch
> and it doesn't have to be all at once. Either way it will be
> devastating but if it happens slow investors will keep getting
> sucked in and hurt over and over again.

I haven't quite come around to agreeing with you, but I occasionally
come right up to the edge.

People have generally become a little more educated about the 1929
crash lately, but until recently almost everyone thought THE crash
occurred in 1929. When I told people that the market fell for three
more years, they were surprised. In other words, the generational
"memory" is not of a three-year crash, but a one-day crash.

Is it possible for the same generational changes to occur if there's
no clearly identifiable "one-day crash"? There are some days that I
think it's possible. Another possibility is that the Lehman crash
will retroactively be identified as that day.

But on balance, I really don't believe that's how it's going to wind
out. I still fully expect some kind of total systemic collapse. It
might be a chain reaction collapse in credit default swaps. It might
be a crash in hedge funds. It might be a total panic in money market
funds. It might be a series of bank crashes, possibly starting in
Austria (again!). Or, it might be all of the above.

But I just don't believe that the orderly unwinding that we're seeing
is going to continue. I believe that there will be a moment of
total disorderly panic, and it's that moment that everyone will
remember.

Sincerely,

John

[Witchiepoo]

But, I agree with John and others here--the long term is down--and, the second leg down, to come, should be spectacular.

I know a few people who are watching the market right now and waiting for it to "peak," so they can dump everything. If they are at all representive of the general public, then yes, it will be quite spectacular.

[freddyv]

Dear Fred,

> One thing that is interesting is how people are learning as they
> go. The move from 7,500 to under 5,000 is only 2,500 points and
> could happen in a single, typical leg down. But such a move would
> be ANOTHER devastation to investors and would literally alter
> their sense of reality just a bit more. This is what I argued with
> John about before; that the "crash" is happening now, as we watch
> and it doesn't have to be all at once. Either way it will be
> devastating but if it happens slow investors will keep getting
> sucked in and hurt over and over again.

I haven't quite come around to agreeing with you, but I occasionally
come right up to the edge.
...
Is it possible for the same generational changes to occur if there's
no clearly identifiable "one-day crash"? There are some days that I
think it's possible. Another possibility is that the Lehman crash
will retroactively be identified as that day.
...
But on balance, I really don't believe that's how it's going to wind
out. I still fully expect some kind of total systemic collapse.

Sincerely,

John

And I certainly can't rule out a complete systemic crash simply because we have been so close already and it's not hard to put a scenario together for one going forward.

I have to say that the thought is rather exhilarating after going through the events of last October. As scary as they were they were also completely captivating and really got my adrenaline going. I was full-on double short the market at that time and saw my retirement account balloon in a matter of days. Too bad I was too scared to sell my SDS right at the bottom on October 10th. And let's face it, there's nothing quite like watching history unfold live, right in front of you.

As far as a total systemic collapse, I would settle for shysters like Jim Cramer (did you see him on Jon Stewart?) being hauled off to jail or at least being taken off the air. I think that would do a lot to reset the values of our society.

--Fred

[freddyv]

Outstanding post today, John. I suggest everyone read it, if you haven't yet. Here is a quote:

Here are the attitudes that are changing:

People will not "start spending again." People are beginning to understand that if they save a dollar today, then that dollar may save their lives a year from now. Those of you who remember how parsimonious and penny-pinching your grandparents were should understand that you and everyone else are turning more and more into your grandparents. Your transformation will be complete before all this is over.

It's impossible to "restore trust" in the financial system. Bankers will be blamed for this catastrophe, and they'll be distrusted and reviled for years. I wrote recently how spooky I'm finding it personally that I'm suddenly hearing exactly the same rhetoric about greedy bankers that I used to hear all the time when I was growing up in the 1950s.

The "credit crunch" will not be reversed. After the 1930s, debt and credit were treated with extreme suspicion for decades, and that will happen again. People are learning that debt is the road to personal disaster.

Banks will not "start lending again," as they did before. There will always be some lending, of course, but it will grow very slowly, over many years, and it will never be as extravagant as it's been, as long as current generations are alive.

New regulations are almost useless. I explained all this in my "The outlook for 2009." There were plenty of regulations passed in the 1930s to prevent the current catastrophe, but they were all ignored or repealed at exactly the time when they were needed. This was done over many years, but I believe that the crucial turn was taken in 1999, when the Glass-Steagall act was repealed, and Fannie Mae and Freddie Mac turned seriously into structured finance. New regulations aren't needed today, because nobody would invest in a mortgage-backed CDO today. As soon as the regulations are needed, they'll be repealed by later generations.

http://www.generationaldynamics.com/cgi ... 26#e090326

--Fred

[aedens]

aedens,

That chart (projections out through 2080) is pretty amazing. Can you tell me where you got it and how I can get a copy?

March 16, 2009: The Federal Reserve Board plans to issue an annual revision to the index of industrial production (IP) and the related measures of capacity and capacity utilization on March 27, 2009, at 2:00 p.m..

http://www.federalreserve.gov/releases/
It was from a think tank such as the likes of Brooking's. No matter since Numbers are posted very soon to reality. It would be better to index the (IP) to sector p/e for any consideration. I would add "The U.S. crisis reflects regulatory problems in the U.S. and innovative financial products that ignored basic economic rules,'' former Chinese central bank deputy governor Wu Xiaoling told a financial conference in Beijing recently." "The U.S. crisis today would be China's tomorrow if financial products such as securitization are introduced without proper risk-control measures.'' Chinas' cautious attitude, government banks, and regulatory framework have helped China to restrict its losses and write-downs from the credit-market crisis to less than 1 percent of the massive global total. The feasibility of bank nationalizations, closer regulation, and banning certain types of transactions, such as derivatives, which carry excessive risk are all lessons which can be learned from China. Banks, financial companies, and the wealthy should not be allowed to unload their bad debts onto ordinary workers and taxpayers. It's sheer madness to allow them to transfer a trillion dollars from workers and taxpayers to themselves.

The US has become increasingly frustrated by what it says is the gutting of its proposals to cut farm tariffs. Rich WTO members such as the EU, Japan and Switzerland, and poorer countries such as India, Indonesia and the Philippines, have sought to protect a wide range of agricultural products from tariff cuts. Susan Schwab, US trade representative, said such exemptions would defeat the object of the talks, to create trade flows. “As we went through the layers of loopholes . . . we discovered that a couple of our trading partners were more interested in loopholes than market access,” she said. Pascal Lamy, WTO director-general, said the failure would “send out a strong negative signal for the future of the world economy amidst the danger of a resurgence of protectionism”. The suspension has brought one of the darkest days to the WTO since its creation in 1995. Copyright The Financial Times Limited 2009

By INVESTOR'S BUSINESS DAILY
The U-turn followed months of relentlessly negative comments, with repeated and inapt comparisons to the Great Depression. But the apocalyptic rhetoric served a purpose. It helped pass the biggest expansion of government since the New Deal — with a pork-laden "stimulus" package of $787 billion, a permanent boost in spending of $1 trillion over a decade, another $275 billion bank bailout, $8 trillion in new debt and a $1.4 trillion, 10-year tax hike. But these measures won't help our economy. If anything, they may just enfeeble the recovery that's now shaping up. No politician who voted for these job- and growth-killing measures should claim any credit for our eventual rebound. America's workers and businesses took the pain. And, as usual, they — and not our saviors in Washington — will bring us back.

I would consider sharply to revisit John's posting to earning's

[mannfm11]

I think we will see the crash. This decline has been a really nice Elliott pattern and Robert Prechters group got off at 7000. I have traded elliott before and when you have a clue what the right count is, it is like shooting fish in a barrel. Knowing where you are in a long term market can be difficult for a variety of reason, mainly that long time frames are supposed to be drawn in patterns and counting the waves is subject to interpretation. But, I will take Prechters word for now as there are many interpretations on the bear side and they all call for the same thing next. That is either a wave 3 or a higher degree wave C. When I say next, I mean after wave B or wave 2 happens. In either case, the next leg down is a crash wave and it will be more significant than the one we already had.

To draw a comparision, the crash of this decline was the Septermber to November leg, wave 3 of 3 of A or 1. The next wave down, the entire thing will look like October and the powerful wave will look like 1929 and the whole thing will look like 1930 to 1932. The wealthy that stay in this game won't be wealthy when it is over and anyone that owe much money will probably be in bankruptcy. Housing will do the same thing, but to a lesser degree and the depression in housing will last much longer than the stock market.

Freddy makes a good point, but I think he misses some of the points. I write a lot on the net and one of the things I mention is that if one guy had a million on the top and got out on the recent bottom, he will more money when it is done than the guy that bought the bottom tick and held to the actual bottom. Remember, we were only down about 55%. This thing is going to a minimum of 3000 and I venture to possibly under 1000. You have to remember that the top in 2000 was 11,700 and the Dow was dolled up to reach a new high that really wasn't that much above the 11,700 in real terms. Had they not split GE, INTC, AXP and a few others at the top in 2000, both the 2002 bottom and the 2007 top would have been much lower. GE is 10 and it was close to 60 when they split it and INTC was 72 when they split it and it didn't make 30 on the rebound, meaning they moved its gain to the other stocks and reduced its loss by 50% When I say these prices, I mean the current split price, not the unsplit price, which were 160 or so for GE on a 3 for 1 and around 140 for INTC on a 2 for 1.

My point is that the Dow went from about 1600 at the start of 1987 to what was actually close to 14,000 in 2000 when you sort out the nonsense and index changes. You might note the S&P, which is a very close index made a double top in 2000 and 2007 to confirm what I mean. In any case, the trip back to under 2000 isn't that far in time. It might be far in price, but not in time and John mentions what he saw in 2002 when he looked at the charts. I had been aware of the chart for some time and studied the Japan market, which is trading at 20 cents on the dollar relative to the top of 1989 (December 31, 1989). 20 cents on the dollar of a dividend and earnings declining Dow is 2800. In any case, we are looking at 35 cents on the dollar from the current price to reach 2800 and the Nikkei actually declined to about 17 cents on the dollar and to prices last seen in 1983. The Dow as in the low teens in 1983, which would put the loss at about 85%. I believe the wave 3 loss, probably from the 10,000 area will be 89% based on a fibonacci multiple of the roughly 55% the first leg took.

The point is double. For one, the bubble finance has been going on so long that few can relate to the easy business terms of making a profit. I bet there are n more than 20% of management in the US that has a clue how to turn a profit in a tough business climate and once they start cutting throats, it will be almost impossible for the 20% to earn consistent profits. They won't get there by paying large bonuses or spending every dime they get buying back their own stock, something I believe will cease to happen. The last time significant trade in companies own stock happened prior to this bull was the late 1920's. There are so many parallels that more carnage is sure to happen. Unless you are a skilled trader, I would stay out of this mess, as it is likely to whipsaw like it did today. The market makers are running this game and they know where the orders are. The stock market is a shell game and the players that don't know this will find out.

[aedens]

I think we will see the crash. This decline has been a really nice Elliott pattern and Robert Prechters group got off at 7000. I have traded elliott before and when you have a clue what the right count is, it is like shooting fish in a barrel. Knowing where you are in a long term market can be difficult for a variety of reason, mainly that long time frames are supposed to be drawn in patterns and counting the waves is subject to interpretation. But, I will take Prechters word for now as there are many interpretations on the bear side and they all call for the same thing next. That is either a wave 3 or a higher degree wave C. When I say next, I mean after wave B or wave 2 happens. In either case, the next leg down is a crash wave and it will be more significant than the one we already had.


The point is double. For one, the bubble finance has been going on so long that few can relate to the easy business terms of making a profit. I bet there are n more than 20% of management in the US that has a clue how to turn a profit in a tough business climate and once they start cutting throats, it will be almost impossible for the 20% to earn consistent profits. They won't get there by paying large bonuses or spending every dime they get buying back their own stock, something I believe will cease to happen. The last time significant trade in companies own stock happened prior to this bull was the late 1920's. There are so many parallels that more carnage is sure to happen. Unless you are a skilled trader, I would stay out of this mess, as it is likely to whipsaw like it did today. The market makers are running this game and they know where the orders are. The stock market is a shell game and the players that don't know this will find out.

Firms now have three options: First, they can go out of business. Second, they can fight back by trying even harder to satisfy customer needs and wants better than their rivals. And third, they can now cajole their elected representatives to intervene in the market process by contributing directly to them or to their pet causes—making it costly or even impossible for meaningful competition to develop in the market at all.
The technical term that economists use for the third option is rent-dissipation. It describes what happens when possible investment capital is invested in the political class rather than on customers. When this happens, the wealth creation process is hampered considerably. The successful firms are those that are willing and able to pay up for the implied assurance that politicians won’t throw obstacles in the way of the firms’ attempt to participate in the market. The costs of rent dissipation are perhaps more evident to economists, and they generally admired those for refusing to play this game.
Successful firms today still must satisfy the consumer in order to remain in business, but they also must satisfy the political class as well. Failure to do either can spell doom for the naïve firm.