Financial topics

[Higgenbotham]

Not sure I buy it, but here’s an interesting perspective on the current market (and the difference between panics and crashes):
http://www.marketoracle.co.uk/Article8285.html

He's comparing the Panic of 1907 to 2008, but the climax and aftermath are a lot different. In 1907, there was a run on Knickerbocker Trust and Westinghouse went bankrupt. Interest rates shot through the roof as they did in all panics as there was no lender of last resort (Fed) to provide liquidity. Except for Knickerbocker, there were no fundamental problems with the banks in 1907. If such were the case today, the panic would be over, the Fed could offload its balance sheet back to the banks because what it took in from the banks would be good collateral anyway, and everything would go back to normal. A panic is just a liquidity problem with the banks. What we are facing today is an insolvency problem. No resemblance to 1907 whatsoever.

[freddyv]

Not sure I buy it, but here’s an interesting perspective on the current market (and the difference between panics and crashes):
http://www.marketoracle.co.uk/Article8285.html

I was trying to give the devil his due and then read this:

Meanwhile a crash is “a sudden general collapse of the stock market”. Technically crashes are more extreme than panics, a 20% decline in major stock indexes in 2 days (3 at most). During 2008's panic, the SPX's biggest 2-day and 3-day declines were just 12.4% and 13.9%. Bad, no doubt, but still nowhere close to the classic 20%+ crash metric. October 1929 (DJIA) saw 23.0% in 2 days while October 1987 (SPX) saw 24.6% in 2 (20.5% in 1). Crashes are not panics and panics are not crashes.

This article is a great example of non-critical thinking. Anyone who would read that line equating the crash of '87 with the crash of '29 and keep reading needs to take a course in critical thinking 101. Do I really need to point out that one was followed by The Great Depression while the other was followed by the most prosperous time in human history?

Is it not obvious to anyone with a brain that what we're going through right now is much more similar to 1929-1930 than 1987? One might be able to argue that things are so far much better than in The Great Depression but to argue that 2008 is just another 1987 is completely beyond my comprehension.

Notice how 1987, which actually lost over 20% in a single day, was made to fit with 1929, which lost about the same amount in two days? That was done to get the data to fit his expectations. It is intellectual dishonesty.

I've always liked those "a is to b as c is to ?" questions on IQ tests and this is a fine example: if 1987 was a steeper decline and resulted in a better long-term outcome compared to 1929 wouldn't that suggest that 2008's declines, which were less steep than either 1929 or 1987, should result in an even worse long-term result? Well...no, not by themselves. Deciding the long-term outcome on that data alone while ignoring all the other data that we have, like the massive amounts of debt and corruption and the overvaluation of the market, is foolish.

Once again we have someone who is using data to fit their hopes for the future instead of using the data in an honest and useful way.

--Fred

[Gordo]

Is it not obvious to anyone with a brain that what we're going through right now is much more similar to 1929-1930 than 1987? One might be able to argue that things are so far much better than in The Great Depression but to argue that 2008 is just another 1987 is completely beyond my comprehension.

I don't think you read very carefully. He said the OPPOSITE of what you thought he said. He is arguing that today is NOT like '87 or '29. On that point I agree with him.

Crashes emerge suddenly off of very high stock prices after a powerful secular bull. As events spawned from euphoria, they generally aren't taken too seriously at the time. Within the weeks immediately after, enthusiastic bulls are aggressively buying “the dip”. These events are perceived as a mere technical anomaly at the time, not the harbinger of a coming secular bear which is usually what they portend.

Conversely panics cascade into existence in weak markets . They happen near the ends of bears off of already-low stock prices. They slowly evolve over months, not days like crashes. They lead to such morose sentiment that nearly everyone assumes the panic-driven stock lows are going to persist indefinitely. Instead of being seen as a technical anomaly, at the time they are viewed as fundamentally rational and the herald of depressed stock prices for years to come.

So as you read this essay, realize that panics and crashes are different types of events that are not interchangeable.

[Higgenbotham]

Stocks probably had deeper 2 and 3 day crashes in 1929 because the debt (margin debt) was in stocks and also because the Fed was more proactive this time around. If the Fed had not stepped in with the $105 billion infusion into money markets on September 18, 2008, the experts at the banks who were interviewed estimated the market would have dropped over 20% in one day. I don't see how a slower grind makes it any less meaningful. If I chop my finger off in 8 pieces instead of doing it all at once, what is the difference? Today the debt is mostly in real estate and the plunges in the credit markets (like the ABX indices) led the stock market lower. Since real estate is more illiquid than stocks, this crash has gone in slow motion. And I do believe that it is still a crash, and is just getting warmed up for the real crash that is coming within the next 6 months and probably within the next month. The stock market did come off of very high levels, contrary to what the author of the article states. In addition to that, as I've stated before, the most highly levered players were gambling on oil and silver, and commodities in general. The oil and silver crashes were more devastating as a result.

The author of this article Gordo referred to was recommending the long side of the silver market in 2008, right at the highs. He wrote several articles on that subject which are still archived on the Internet in various places. One I remember in May 2008 stated that silver was probably forming a base in the $17-19 area and then would take off to new highs over the old high of $21. Instead, silver crashed to $8.

If I'd been caught with my pants down in that silver debacle, I'd probably want to try to sell a lot of newsletters too. One of the best ways to sell newsletters is to come up with a specious and wacky prediction that nobody else has come up with. That way, on the small chance that it will be proven right, you might be able to sell even more newsletters.

[freddyv]

I don't think you read very carefully. He said the OPPOSITE of what you thought he said. He is arguing that today is NOT like '87 or '29. On that point I agree with him.

I read carefully and quoted what I read. In reading the entire article the same mistake is made over and over; the author is wedded to a preconception. He states the following:

As a hardcore contrarian, I expect 2009 to follow this big-recovery-rally pattern so I am fighting the crowd and going heavily long. Odds are 2009 will be awesome.

Yes, that sounds like informed opinion based on hard data.

I also like to look at stock charts and notice the similarities but I do so in context, which this person seems to lack. The foremost experts, those that have been right so far, (ECRI, Nouriel Roubini, Meredith Whitney and Louise Yamada are prime examples) keep telling me that housing won't recover for perhaps two years and that the economy as a whole hasn't yet hit bottom and I am supposed to ignore that because one chart looks like another?

Using contrarian indicators is a smart thing but using them while ignoring the underlying problems facing our economy seems unwise.

And if he is a true contrarian, why is he making such a statement:

Many people think we are entering a new Great Depression today. If that is the case, then 2009 will indeed be bad. But I don't see a neo-Great Depression emerging for a wide array of reasons, as I discussed in depth for our subscribers in the 12/08 issue of Zeal Intelligence . The primary reason is the Great Depression saw the US economy literally cut in half between 1929 and 1933. Even the most raging bear today doesn't expect US economic output a few years from now to be half of 2007's levels.

Doesn't that suggest that it is more likely to happen, since people think it can't happen? Did people think in 1929 or even in 1930 that things would get as bad as they did? There is abundant evidence that they did not. Contrary to common belief the government had lowered interest rates to historic lows, just like now, and yet the economy continued to spiral downward...why? Powerful people stepped up to stop the downward spiral and could not...why? Because of the excess already built into the economy that had to deflate out. Because the generation in power believed it could not happen. Because people all along the way continued to speculate and placed hope over reason and refused to believe that debt must be paid off one way or the other - it can't be done with more debt.

I stick with my prediction that the stock market will reach significant new lows in 2009 and will likely do so sooner rather than later. I expect 2009 to be worse for stocks than 2008. Now that is contrarian, Gordo, since I have heard very few people on CNBC lately who haven't suggested we have hit bottom or are in a bottoming process.

--Fred

[freddyv]

A clear example of why I think the market will continue to sell off for the forseeable future.

Gemstone, and trillions of dollars of investments like it, have not gone away. Loans that cannot be paid, bad mortgage investments and other worrisome financial instruments are clogging up companies and, increasingly, courts. More than 100 securities cases involving losses of $400 billion were filed against financial firms last year, according to Cornerstone Research. The legal wrangling has only just begun.

Among the most toxic investments that Wall Street devised as housing boomed were C.D.O.’s, which bundled together all kinds of debt, including subprime mortgages. But Gemstone was a popular variant: a hybrid C.D.O., composed not only of mortgage bonds but also of credit-default swaps, which have played a critical role in the running crisis.

This type of garbage permeates our economy and our society. Experts in finance were duped like little kids and then come on the TV or write in their blogs how things have to get better unless the world is coming to an end. I say the world IS coming to an end for a lot of people; the world as they knew it will never be the same, they just refuse to accept that fact.

--Fred

[freddyv]

So imagine you had billions of dollars; you would never have to worry right? Now imagine you lost 8 billion in a single quarter...

The Saudi investment company that bet big on now-ailing Citigroup and other major global companies said Tuesday it lost more than $8 billion in the last three months of 2008.

It may seem to all be going in slow motion but I have a feeling that we are so used to being able to fast-forward and replay and to looking in the rear-view-mirror of history that we simply don't really know what an economic disaster looks like even as we live it.

The building my office is in is almost empty and the architect who is still in the building apparently has spent all the deposits he had collected from his tenants (probably to invest in real estate that would never go down in price) and wrote a check to someone I know when they threatened him and then the check bounced...he's broke and he's not the only one, the problem is that we have no more credit to live on.

This is not why I think the stock market is going down much farther, it's this along with the fact that the market is down hundreds of points on a day when everyone in the country (with a few expceptions) is happy about our new, young, intelligent president and it's because companies who speculated on oil are now storing it in supertankers and yet the price of oil continues its slide.

It's because shipping rates are at ZERO!

It's because at a P/E ratio of 16 (or is it 20?) the S&P 500 is touted as "cheap" by people who actually make hundreds of thousands of dollars a year for doling out investment advice. It's because people continue to speculate even though they have gotten burned time and time again. It's because even smart cookies like those who run Goldman Sachs are losing their asses even while they attempt to manipulate markets.

It's because even our best and brightest are running around like chickens with their heads cut off (I actually cut a chicken's head off once and it's quite a sight), all the while trying to comfort us and assure us not to sell our stock or panic because everything will be allright. Please, just ignore the fact that that man who is supposed to be serving the public is giving billions of dollars to his buddies, it's for the good of the nation. Please go back to your American Idol.

It's because everytime someone makes a prediction it ends up worse than the prediction...have you noticed that? When is this six months going to be up because I've been hearing that for well over a year now.

Yeah, I have a feeling we're once again coming to the edge of the cliff....

--Fred

[John]

Amen, Fred.

John

[Higgenbotham]

I made a couple statements last night and this morning and noticed tonight that related observations are starting to make their way into the news and the blogs.

The first was about the difference between the general condition of the banks in 1907 versus 2008 where generally the banks were illiquid in 1907 but not insolvent, whereas the banks today are generally insolvent. Mish picked up an article from over the weekend and posted it on his blog today. It states as follows:

Britains biggest banks are "technically insolvent", Royal Bank of Scotland said yesterday, as the global banking industry was rocked by another day of turmoil, including the announcement of $23bn (£16bn) of new losses from Merrill Lynch and Citigroup, the giant US institutions.

Analysts working for RBS, one of several British banks to have received emergency funding from the UK Government last year, told the City that "the domestic UK banks are technically insolvent on a fully marked-to-market basis".

The warning does not mean British banks are about to go bust, because the assessment is purely theoretical, and RBS said the position was "not unusual at this stage in the economic cycle".

At best, it means this is not over yet.

http://globaleconomicanalysis.blogspot. ... lvent.html


Second statement was about how credit conditions in the banks were leading the stock market down in 2008. It takes a bit longer for the stock market to adjust to deteriorating credit conditions in the banks than some of the factors that were present in 1929. John Hussman just posted an article describing the sudden deterioration in credit conditions as being the basis for his recent cautious stance on the stock market:

In recent sessions, we have observed a troublesome deterioration in credit default swap spreads among a number of major financials, which has prompted us to tighten our hedges in response...

Another hopeful aspect to current conditions is the possibility of some significant policy announcement regarding financials as the Obama administration begins. From my perspective, the factor of immediate concern is again the capital cushion on the liability side of bank balance sheets. As banks experience losses on the asset side of their balance sheets, the same amount has to be subtracted from the liability side, and that amount comes out of “shareholder equity,” more commonly known as “capital.” Failing new capital injections, and quickly, could rapidly produce conditions similar to what we observed in October and November. That is what the rapid spike in credit default spreads is telling us here...

If we get the S&P 500 back down toward the 700 level or below, I would expect that we will begin taking on more market exposure on the basis of valuation, as we did in October and November. That said, I would expect that we'll be somewhat slower to do so, given the generally poor follow-through that we've observed in the recent market recovery.

As always, we'll respond to market conditions as they evolve. I recognize that my tone regarding the stock market has taken a quick turn toward a defensive posture, but that quick turn reflects what we've observed in various measures of credit distress and market internals. This is why I avoid forecasts. We move as the evidence moves.

http://www.hussmanfunds.com/wmc/wmc090119.htm

[Matt1989]

Surprise today, amidst all the optimism. Is there a clearer sign that Wall Street has no confidence?