Please Close the Markets

In kind of a doleful epiphany last night, I finally got it; why the markets, heretofore meant to be efficient, cannot function under the present circumstances.

The only person in the investment triangle worth saving - the investor - is now the only one who is being penalized for "staying the course". He is without protection in the current malaise. Sellers are protected - they are out, or piggybacking on shorts preying on those who remain in. If you could look out at the week ahead and feel fairly certain that you will lose 3% on Monday, 1% on Tuesday, 4% on Wednesday, 5% on Thursday and 3% on Friday, why would you stay in? That's a year's gains lost in a week.

Being "in" the market as a shareholder today is akin to being in a large swimming pool with hundreds of naked people and 4 or 5 very hungry Great White sharks. You can see people being eaten alive, you can hear their screams and see the blood in the water, and yet all's you have to do is hop out of the water and get out at the side of the pool. Then you're safe. Why wouldn't you do this?

The sentiment indicators I follow are at zero - zero buying, zero stocks in the SPX 500 above their 50 day moving average - and as anyone knows, you can multiply zero by any number and only get more of the same. No...now there are only sellers, and in a self-fulfilling prophecy the more they sell and get out of the pool the fewer people are left in the water to be eaten, which only intensifies the sharks of selling, which puts the odds - and more pressure - on those in the pool to abandon all hope and get out.

Shareholders are important for publicly traded companies. $50 trillion in capital and retirement funds business expansion in our economy.

Like I said before, those who abandon the paradigm, who sell and get out, maybe never to return - by their very act protect themselves and what capital they have left. How do we protect those who stay the course, who put up their hard-earned capital to remain in the game? Nothing is being done for them. There is a worldwide holocaust of investment capital occurring and the killing must be stopped or we will have a systemic meltdown within a short time.

The financial system is now destroying its own supporters and rewarding its destroyers. If you can see it for what it is - and know that by Friday there is a good chance that your stocks will be 20% less - why would you hold at today’s prices? And further, since many companies are net of debt and selling for their cash levels, does anyone really think that their business is worth nothing? I don't think so. I think it's worth a lot more than that, but the current malaise in the financial system is structured so that true value no longer matters. The system is broken. Things are not what they are feared to be, but the fear is so strong and so unbreakable that an investor either lives with the constant fear or escapes.

I think the markets should be closed for a one-week "cooling off" period and in the interim, the hedge funds that need to liquidate should state the truth of their circumstances to the Feds, sell the stocks they need to sell to the government at Friday's closing price on the agreement that they will return all excess capital to their shareholders, and then close their doors; and then have the markets reopen.

But here's the rub, what if those un-sellable assets are mortgage-backed securities or other such stuff - and in such a quantity that no one can absorb it? Then it's lights out. What if there is now so much selling lined up at the door that there is not enough remaining investment capital in the world to satiate it? Our financial system of publicly traded companies collapses and cash (or gold) is king. This is what happened during the Great Depression and why we are very very close to this happening again.

I think the Fed should cut rates to 1% on posthaste - not Wednesday. Why the hell does decorum matter in a holocaust? The Europeans need to cut rates a full percentage point too, and not when they damn well feel like it in November sometime. What are these violin-laying Neros thinking? Don't they get it? It doesn't look like it.

We no longer have a "market" as you and I have come to know it. We have Saturn eating his children.

Comments

[Moon Kil Woong:]

A bit dire. Closing the market does make everything 0. So I fail to see how that will help.

But yes, banks, brokerages, and insurance companies that spawned these derivatives seem to be the only ones benefitting, esp Goldman. But Paulson is from Goldman so I guess that's obvious (bailing out AIG just bails out Goldman since they mostly owe Goldman $ for bad derivatives).

Rather than closing the market maybe they should think about closing all banks playing the CDS game and voiding all those transactions before they deag the whole us into a $42 trillion dollar black hole.

2008 Oct 26 08:52 AM

[SW Richmond:]

"What if there is now so much selling lined up at the door that there is not enough remaining investment capital in the world to satiate it?"

There is not enough capital remaining, at least not real capital. There will be plenty of printed capital, but it just isn't the same thing, you know? This is the result of 35-to-1 leverage working in reverse. Capital left in play is destroyed.

"those who abandon the paradigm, who sell and get out, maybe never to return - by their very act protect themselves and what capital they have left."

I sold and got out In October '07, DOW 13,000. Boy do I feel protected. I won't be back, I promise. I've written several rants (as comments) here on SA about this. This thing we call the stock market is supposed to be a place where companies raise capital to apply productively. It broadly is no longer that at all, but rather is akin to your shark analogy. The small "investor" is nothing but meat to Wall Street, the hedgies, and now also to Treasury and Bernanke who swoop in and wipe out equity whenever JPMorgan needs more deposit base.

Central banking is evil incarnate; all the malice of government flows from it.

Closing the markets makes everything worth exactly zero; it's gonna happen. Here is a short list of things do be goddamned scared of:
1. "Force Majeure" and other contract abnegation - the financial equivalent of martial law. This is when the geniuses who got us into this mess force all of us to accept their plan for getting us out of it by seizing our assets and doing whatever they damned well please with them. This will, within days or even hours, be accompanied by:
2. Martial law. Americans don't like having their assets seized and will react badly to it. The dependency class doesn't like having their benefits threatened and will react badly to it. Didn't Obama promise us all health care?
3. US Treasury Bond Apocalypse. According to this web site:
www.treasurydirect.gov...
the US national debt has gone up, so far this month, by $400 Billion, an annual rate of $6 Trillion per year. There isn't this much capital available anywhere to my knowledge. Guess where it's going to come from. And we haven't even started yet to do the infrastructure projects that the Government is going to want to do after the election. Since you can't print capital, this printing will merely debase what is left of real capital and engender a currency crisis and hyperinflation.

2008 Oct 26 09:28 AM

[Midas Mulligan:]

"I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."

Thomas Jefferson
1816

Alas, what would President Jefferson think of a "swindle" on the order of $700 billion to preserve these fine, modern-day banking establishments ?

2008 Oct 26 10:17 AM

[bearfund:]

Closing markets never solves anything (just ask Russia and Iceland). If you do it, people will trade in the streets instead. And perhaps more to the point, it removes the last traces of liquidity and condemns late panickers to bankruptcy. The prices are what people are willing to pay. Not having a safe, convenient place to ask and offer those prices does not make them higher.

2008 Oct 26 11:01 AM

[Griz:]

Only thing that I'm scared of as I sit here gleefully getting in and out of put contracts on various ETF's, is that the gov't takes back the cash I have on the sidelines in CD's. I have been very quick to mop up all loose cash before the "Force Majeure" sets in because I believe (possibly foolishly) that these vehicles will be protected.

At some point the only thing left that really has value might be some farmland in Indiana...

2008 Oct 26 11:02 AM

[johnhaskell:]

since there are no buyers, I assume volume on the NYSE today is zero? Please confirm this.

BTW the Russian market in 1998 fell 93% in twelve months but trades continued to be put through the system and buyers found, even though no one was protecting them, kissing them where it hurt or giving them a hug when they fell down.

2008 Oct 27 11:46 AM

[HKI:]

What kind of stupid idea is this? Close the markets?

Here is a suggestion. Stop looking at the stock prices and close the market for "YOURSELF". The market price is there for people to buy and sell. And if you don't intend to do either and doesn't have the psychological make-up to follow its ups and downs, stop looking at it. Go do something useful like writing a thoughtful article on seekingalpha. But this article certainly isn't one of them.

2008 Oct 27 11:29 PM