Stock Market

[tw]

What makes me nervous is when so many say this is only a correction. Well even a stock market crash is a correction.

For example, Citibank apparently made massive bets and is now exposed for a problem that amounts to $billions. Many hedge funds have been bailed out quietly on the order of many $billions by their holding companies that were once considered 'protected' by financial circuit breakers. Even Goldman Sachs is taking a beating.

Meanwhile, dollars are in massive amounts overseas. No one is quite sure how large those numbers really are. Those dollars are held in assets such as bonds. What is this problem mostly appearing in? Bond markets. What happened if those other nations decide to cut their losses due to a sharply failing dollar - start selling bonds which are financing the American government at about $2 or $3billion per day? Does that number open any eyes? Who has the most American bonds? China - on the order estimated in the $trillions. Remember an earlier post - the actualy amount of currency in all demoninations throughout the world is about $5.7 trillion.

Already central banks have been spending untold $billions trying to maintain liquidity. Capital assets once used as collateral for so many speculative loans is suddenly becoming worth far less than original market value estimates.

Appreciate the problem facing the Federal Reserve. Inflation is threatening. Therefore interest rates must remain same or increase. But the liquidity crunch means the Fed must lower interest rates. A nation that was using finance games to keep the housing and auto markets going (because other market sectors were not doing as well) means the Fed has lost significant manuevering room.

No, I don't believe we are in for a major crash. But when more people say this is not a problem then a worse downturn results. The problem: nobody really knows how much 'rot' is out there in the finance markets. Hedge funds and other risk diversification tools really have unknown value when things get this uncertain. Nobody is really admitting it. But the amount of bailouts appears to be much more massive than is really being reported. A problem that will not appear in corporate balance sheets typically more like for four years later.

Stock market crash was 1929. When did the resulting recession occur? More like 1933/4.

[slang]

Originally Posted by Aliantha

I predict that the knock on or trickle up effect will be a lot higher than some of our other members here seem to think.

That seems almost certain in my mind. We are all fuct until Hillary rides into office to change everything for the better.

[slang]

Originally Posted by tw

No, I don't believe we are in for a major crash. But when more people say this is not a problem then a worse downturn results.

What changes would you make to improve the US economy if you had the power to do so?

What events and policies would you un-do if you had the opportunity to go back in time?

[TheMercenary]

Originally Posted by slang

...until Hillary rides into office to change everything for the better.

HA!

[Griff]

Hmmm... we're in a bad place because of easy credit, so we'll fix it by making more money available. Got it, as you were.

[lookout123]

Is it going to crash? That depends on your definition of crash. If you mean people running around making foolish decisions in a panic while watching well known entertainers (who do more entertaining than legitimate financial advising) scream and yell that the sky is falling and they will need to burn their houses down to get their money out...

Yep, we are already there.

If you mean a catastrophic downturn that leads to widescale corporate bankruptcies, bread lines around the block, and a massive flow of newly homeless people asking you for change... Probably not.

A lot of folks bought houses they shouldn't have. Did mortgage brokers assist them in their stupidity? Yep. Were some of the mortgage brokers participating in illegal activities to generate approvals? Yep, a few of them. Is it all just a big scam pulled on unwitting victims? No. Scratch that - HELL NO. If a person could look around and see that rates were at historic lows and they were stretching themselves thin to fit into the biggest ARM payment they could handle, well, maybe they deserve to be taught a very painful lesson. Markets have a very effective way of returning to averages and people never seem to learn. Most of the folks I meet who are seriously pinched because of the rates are the exact same folks who were screaming about the "unexpected" collapse of the tech boom a few years back. Get over it. A fool and his money... you know the rest.

The mortgage problems are big. They'll probably get bigger. We don't have widescale foreclosures ripping the economy apart. We have lenders who made bad decisions and are now sitting outside the risk exposure model that their business plan is built on. In a knee jerk reaction they've decided the response is to not lend. Oops. Now they don't have current fees coming in to generate revenue to keep investors happy. They will look at their books and realize that even though foreclosures are up, it still makes a very small portion of their portfolio, so they will open up loan programs slowly, allowing things to smooth out. It will not be overnight, but it will happen.

Yesterday we actually touched on the official definition of a "market correction", (a drop of 10% or more) but didn't close below that level. We are due. I have been telling everyone for a year to adjust portfolios for the rainy day in the future. It is all about your asset allocation. Those with good allocations didn't sustain large losses when the tech bubble collapsed because they understood the value of diversification. Those same people will ride this out as well. The loss from a missed opportunity is much less expensive than the loss of reaching too far.

One other thing. Turn off the news. These idiot talking heads only report that "The Dow tumbled 140 points today..." They don't explain that the Dow only represents 30 companies or that more importantly that a 140 drop(or rise) today is as insignificant today as a 20 point move fifteen years ago. Talk percentages, not points.

I'm watchful, but not panicky. I'm actually seeing some fantastic values out there too. And remember folks, Bulls make money, Bears make money, Pigs get slaughtered.

[slang]

Originally Posted by TheMercenary

HA!

It's a scary thought, yes I know.

[Cyclefrance]

I think we are on a bit of a knife-edge right now. It's a strange situation the like of which I've not witnessed before myself - and I've seen and been in a few recessions (and booms).

I was kind of expecting the fuel hikes we've seen to push the economy downwards for quite some time. The availability of growing markets in India, China and the Far East generally seemed to be able to counter that threat, but as we begin to appreciate the cost associated with these markets' growth (slave labour, pollution, contamination in products and so on) we may see a correction there as we address these issues. This will remove the cushioning effect that these markets have provided. That aside the governments and markets generally are well -prepared (i.e. bank-rolled) to try to stave off any crisis - I guess for them it seems the lesser of two evil decisions - spend to stop a mess or lose (probably) more by letting it run unabated.

Well, that's the idea, anyway, but the trouble with this approach in the past has been that the fundamentals have won every time, and trying to buck these has only resulted in a massive loss/waste of revenue as the recession has still come and it has been deeper as a result of the attempts to delay its arrival.

Certainly, I feel that a correction is due - larger than we've seen so far - and I can't help also feeling that it would be better to take the hit as it comes, as this will undoubtedly cause less pain than that resulting from what has always been a futile fight attempting to delay the day.

It'll be interesting to see how durable the Fed's half-percent interest rate cut is as a solution. There's a lot more bad news to come, I reckon...

[lookout123]

The 50 Bps was window dressing for the psyche. A large correction is coming. It has been coming since opening day of the bull market, that's how it works. Whether it comes today, tomorrow or 2009, no one really knows. Economists and market timers have predicted 11 out of the last 9 bear markets and their track record speaks for itself. Buy quality companies based on solid fundamentals. Hold them until there is a fundamental reason not to. Only buy companies that fit within your predetermined asset allocation model and do not veer to the right or left of this regardless of what you hear on the tv or radio.

This could be the beginning of the recession, or not. Just remember that the last recession only lasted 8 months and there are still doomsdayers waiting for that one to end so they can invest again. Seriously, I meet them all the time. They've been sitting on the sidelines since 2002. (notice that they sold at the bottom and missed the last 5 years of gains)

But unless you are retiring and drawing income from your investments in the very near term, relax. There are only two options:
A) This is just like every other time in the market history, it will go down then come back to set new highs, or B) This time it really is different and the market will fall to 0. If that happens so what? Now you are on a level playing field with Bill Gates - neither of your bank accounts are worth anything.

[xoxoxoBruce]

Economists and market timers have predicted 11 out of the last 9 bear markets and their track record speaks for itself.

Say what?

[lookout123]

Just my way of saying that if there were a recession every time the economists were united in believing it was at our doorstep we wouldn't have gone 4.5 years without one. Many many economists are permabears because they live in theoretical worlds surrounded by mountains of negative data. To be fair there are also many permabulls that see everything as proof of the boom we are just entering. Market timers are also notorious. Come to think of it - anyone who claims to be predicting the future of anything usually is wrong just as often as they are right. Crystal balls get foggy and all that jazz.

You can live and invest based on A) predictions, or B) principles (processes). I know what I choose, but everyone has to make that decision for themselves.

[Undertoad]

...there are still doomsdayers waiting for that one to end so they can invest again. Seriously, I meet them all the time. They've been sitting on the sidelines since 2002. (notice that they sold at the bottom and missed the last 5 years of gains)

Schools of thought...

I've been saying it and saying it: for the last 4 years, the mainstream media's economics story is consistently the same: "The economy is secretly bad."

It's like they wrote it with the same outline: The GDP had another quarter of excellent growth. But there are impending signs of disaster.

Every story has had its but.

The major indicies said things were great. So they focused first on the market. When the market boomed, they focused on slow job creation. When the jobs came back, they focused on inequality. When inequality improved, they focused on bad loans.

Now that it's time for the next recession - the inevitable business cycle - they write that it is a "perfect storm". "If people stop spending money we will go into a recession." Durr. Durrrr.

If the AP wrote a weather story it would be "Climate scientists tell us that it's sunny out now, but if a storm comes tomorrow, water will fall from the sky. Water is a major cause of drowning and rots untreated wood." Their economics stories are literally that dumb.

[lookout123]

People have this mistaken idea that the media is still full of journalists who feel compelled to find and report the truth of the world around us, because "people have the right to know".

Turn on your tv and look for a homely broadcaster. Not going to happen. As long as they look good and can read the teleprompter, they're in. Sometimes they don't have to be that good at reading.

Turn on the radio and listen for someone who reports the news of the day in an unbiased, truthful, informative way. Not going to happen. Entertainment rules the airwaves.

The fact of the matter is the media exists for one reason: profit. The way they profit is by selling commercial space. The way they sell commercial space is by gaining and maintaining market share in listeners and viewers. There are only two ways they can get you to tune in daily, 1) Excite you, 2) Scare you. No one would tune into a channel that started their broadcast with, "Today the world was pretty much as it has always been. Some people made money, some people lost money, some people died, and some were born. Here are today's events..." So they have to excite or scare. They aren't creative enough to come up with compelling, positive stories that are also exciting, but they have scaring the public down to a science.
Take the lead paint story as an example. I've been following that one pretty closely so I know which toys are involved. But they got my attention last night with their teaser talking about the dangers found in "some of these toys your children may be playing with right now. Tune in for the details after the break." They showed a woman holding two toys that my son has that I was certain weren't included in the concerns. But they kept my attention for 30 freakin' minutes only to finally report that "toys are dangerous! The chinese are malicious! these toys we've been showing in our teasers are perfectly safe! But what if they weren't?!?" It is exactly what I figured but they still got me to keep their broadcast on.

They do the same thing with financial reports. I have a couple of media types as clients. I can promise you that they know nothing about money or investments, but they sound very convincing when they are expounding on the dangers of rising oil prices and the impending collapse of our economy. I literally saw one "journalist" gravely report that the economy was in danger of spinning out of control because oil went up that day. The very next day oil went down and this very same journalist reported how falling oil prices could lead to broadbased dangers for investors. HUH? Which is it,oh wise one?

The best thing you can do is turn off your tv. If you invest interview and hire an advisor based on his plan for downside money management. It isn't how much you make, it's how much you keep and volatile markets are where an advisor earns his money, or gives you reason to fire him.

[Cyclefrance]

I tend to agree with your views on generalised news coverage - although it's not that bad over here. The major players are the ones who move the markets, buy and sell our pension investments and so on and they rely on the likes of Reuters and Bloomberg for the news they need as part of their decision-making process. Added to this they have sophisticated models to refer to and the hype of the general media is of litte concern.

We, the individuals who see our money go into the institutions, have little control over how the main players react, and the worst we can do is make decisions based on the generl media's extremely (in terms of the way markets work) historic information - by the time they tell us, it's too late.

There's an interesting article in today's Sunday Times Money section which shows the tools available to the likes of Morgan Stanley - not sure I undertood it all, but it shows how much details goes into their decision-making

[lookout123]

The major players do not rely on news services for their tactical decisions, they have their own analysts and use a "use a boots on the ground" method. They send their own people to the companies to review processes, products, and prospects.
Individuals watch the news and make decisions. Those individuals may not mean much with their individual trades but remember "an avalanche starts with just one flake". Individuals are usually in mutual funds. If enough individuals get nervous and put sell orders in the mutual fund manager has to sell his positions to cover the client redemptions. Sometimes this means the fund looks to be losing when in reality it is in a great long term position. But then 10,000 other individuals get nervous and sell.... <insert painful cycle here>