5-1/2 Ways to Make the Market Rally 30 comments
November 21, 2008
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I got thinking about what could cause the market to rise dramatically higher and reverse this extreme oversold condition. These include:
- Ban on short selling. Rumour has it that the government may ban the short selling of Citigroup (C) alone, given that broker desks and hedge funds are pounding down C on the short side with impunity. It is highly unlikely the government will ban all short selling.
- Reinstating the uptick rule. Probably will not happen given the practical difficulties of doing so.
- Suspending mark to market. This would probably give the most fuel to a market rise, though whether it helps over any time frame longer than the very short-term is highly debatable.
- The government buying stocks. Another rumour floating around is the government using TARP money to buy $10 billion worth of Citigroup common stock. The government of Hong Kong bought stocks near the bottom of the 1998 Asian panic.
- A large, cash rich company making a very public buy. Microsoft (MSFT) comes to mind. Management has dismissed that Microsoft is still interested in buying Yahoo (YHOO), but they may just be letting Yahoo twist in the wind before buying. Microsoft buying back its own stock in size, given that it is trading at an 11% free cash flow and less than 6x EV/EBITDA, and being very public that they think the stock is egregiously undervalued would boost the market.
- Me capitulating and liquidating everything. That would probably be the surest sign the bottom was in.
I would be very careful on the short side. I continue to scale in on weakness.
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This article has 30 comments:
Cut mortgage rates to 2.5% for a 30-year fixed loan, and then kick back and watch the buying frenzy begin. Then when things pick up, kick it up to 3%, then to 3.5%, and so on. Lots of empty houses would fill up quick. End of story.
I don't think we are extremely oversold. I think we were extremely overbought. Things were unsustainable with our level of debt. Encouraging more debt with low interest rates isn't the solution. We need to become competitive and profitable again as a nation - which would mean we shouldn't need to take on more debt to hide our problems.
Short-sellers like to defend themselves that they aid price discovery, but lately that's just self-serving nonsense. For every fundamentally driven short-seller, there's 99 who blindly pile on. Just look at the dramatic swings the last half hour of every session. Then throw in a ratings downgrade, and the death spiral begins. Rinse and repeat.
the world is going into a recession. europe actually was leading the way. the baby boomers are beginning to pull up stakes. the world economy needs to find a new level - and therefore the market needs to find a new level based on a world order where the baby boomers are not major contributors.
the debt to net worth ratio of americans is as high as 1929. this is unsustainable - and there is a correction happening now. the market needs to find a new level corresponding to a consumer segment less credit driven.
all the heroics of the government to shore up the economy is costing us money which is on top of a national debt rapidly approaching historical highs relating to gdp. we need to be careful if what we do.
i would not recommend any actions right now until things settle down. there will be unintended consequences.
I agree with that, but was anyone pointing a gun at their head when they signed on the dotted line? As a matter of fact, I walked away from a 160k a year job in DC in 2004 because I felt the real estate market had escaped beyond my reach, and I didn't want to become an endentured mortgage slave. At the time I was wondering how everyone else was making that kind of money and what I had done wrong. Turns out most were biting off more than they could chew. So well, let them chew it anyhow. If they really can't make the payment on their 20-year mortgage, make them take a 30 or 40-year mortgage. They agreed to buy, and now they shouldn't be able to walk away.
Suspending Mark-to-market is a great idea if you want to be like Japan in the past two decades. They thought if they didn't realize their losses, then the losses would go away. Guess what? That didn't happen; Japan was a mix of recession and stagnant economy for 20 years. I don't want our great country to go through the same. We can't hide from our losses; they have to happen We have to experience pain to find glory once again.
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Please explain what are the practical difficulties?
On Nov 22 02:21 AM zzyzx wrote:
> "Reinstating the uptick rule. Probably will not happen given the
> practical difficulties of doing so."
>
> Please explain what are the practical difficulties?
>
In case that is wise, why not introduce the concept of negative interest rates? Instead of all these positive rates that push honest home owners into oblibion, negative rates are the answer!
That brings down the cost of living so people have the possibilty to pay off the loan...
The journalists here in the Netherlands lately suggested another way to let stock markets boom: Make it punishable by law to let stock values going down, one or two years in prison for those who sell too much will do the trick and it brings also home the 'ownership society' where lots of people have lots of stock of highly valued companies...
If I hear one more person talk about he buyers being at fault here I think I will puke.
Don't parrot Kudlow and the bunch just to sound intelligent. The banks have always been the regulator in who could get a mogage and at what rates and to try and put that on the buyer is ridiculous.
Short sellers are not a problem. They also are the catalyst for the next rally when they cover. Friday was a short cover rally and it could in the next few days be the reason we have a rally because the helped to find the bottom. They are not the reason for the bank loses and the crises in lending. Don't be so silly with these distractions.
If this sounds arbitrary, consider whether it is any more arbitrary than marking to market the value of assets for which no market may exist at any given moment.
Having said, several things are just unsustainable- consumer exposure to credit (not to mention the US governments rising bebt obligation). But it is not the best solution to let the economy all these mishaps at once. We have to help the system stay on a working condition while correcting the US consumer dependence on credit and housing market in the long term. But now, we have to save the economy from going into depression where everybody will hurt (trust me it is painful).
Former Fed Officials agree... Thanks for your comments, which are quite thoughtful. I will keep up this fight until SFAS 157 is suspended, as it is destroying our financial system and taking the economy with it. Best regards, Bill William M. Isaac
Chairman
The Secura Group of LECG
--- On Fri, 11/21/08, Bob McTeer wrote:
Thanks. I heard Sec Paulson on the radio yesterday refer to mark to market accounting as "pro cyclical." That's encouraging. Bob
--- On Thu, 11/20/08, Jadogsl wrote:
Did the enforcement of Fair Value Accounting i.e FAS 157 effective for fiscal years beginning after November 15, 2007 coincide with the early stages of the meltdown of the bond and equity markets ? Or was it a coincidence ?
There is no doubt that some financial-services firms found themselves ill-equipped to perform such acrobatics. Finance executives in the sector complained that the fair-value rules were "pro-cyclical" - that they were a self-fulfilling prophecy forcing banks to sell their securities in plummeting markets. ( paraphrased from CFO.com )
The big picture, a common sense view .... CSCO stock was at $80 in 2000. The cash flow value was $18. Had margin been against $18 instead of $80 the bubble in tech stocks may never have happened. Also in 2002, CSCO was at $11. Cash flow value ? $18. How do the purists defend Fair Value accounting 'allowing' margin loans against an $80 stocks really worth $18 by conservative estimates ? Migrate this example to Las Vegas real estate in 2005 and you have the achilles heal of Fair Value accounting.
George Soros speaks of reflexivity as the main component of his investing thesis. The key element is banks lending against overvalued assets create bubbles and the withdrawal of lending against falling asset values creates the bust. A mark to model across all spectrums, Margin...Home lending etc would REDUCE the risk to our financial system and bring sanity to our financial markets.
The real fix is INDEPENDENT firms that audit companies. Firing without cause should be eliminated when it comes to these firms. Whistleblower laws with teeth wouldn't hurt either. After all Enron wasn't a mark to market issue. Top people knew the value of the assets but were afraid to speak. It was a regulatory issue.
Finally, the toxic mortgage paper at Bear Stearns, seems its performing
well, Bear needed not go under at all. If you can't find this link it's on
seeking alpha website, search for Bear Stearns.
seekingalpha.com/artic...
Temporary deflation (but not in all categories), a new President with 'change' on the agenda, followed by a shitload of inflation like we've never seen before - well, maybe during the Civil War. Debt will become worth-less, real estate and equities will be inflated back up again, and the devaluation of the dollar will take hold. Cash will be un-king, and the shitload of inflation will give way to a shitload of problems. Circa 1979-1982 X10 coming up.
On Nov 22 12:45 AM eddy shore wrote:
> well no one put a gun to the heads of the bankers either. your telling
> me they didnt know someone making 50K a year was gonna default on
> 450,000 loan? yet my tax dollars have to bail them out. i say let
> em all hang. the sooner we come clean and stop trying to save everyone
> the sooner we'll get past this mess and move on.
Is it the bankers problem to try and figure out what the buyer is trying to do? NO! Have you ever heard of a bridge loan? Most of these people were trying to flip houses. They got caught on the bridge. Too bad so sad! Lock them into a second 0% mortgage that they cannot refinance. Then lock them into a real world mortgage they can afford.