Friday's Action Was A Much-Needed Dose of Reality 10 comments
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What I do know is that between here and there the market needs to get the complacency wrung out, and Friday's action was a step in the right direction. We all knew the market would get blindsided by something out of left field. This time it was a series of credit-related events culminating by the CFO of Bear Stearns' (BSC) willingness to tell the truth: That this was the worst credit market his firm has seen in 22 years.
As if any of this should be a surprise? Nobody wants to see anybody lose money, but investors have been living in a world of denial for months about the growing size of debt-backed private equity deals, the mortgage mess and the related ripple effects.
The only good news, it appears, is this time the retail investors didn't take the bait and pile in at the last minute. The bad news: Maybe many of them were too worried about their mortgages to participate, which in a strange way may have actually been a blessing.
Many of those investors are sitting in homes financed by adjustable loans that are about to come due. Others have homes in escrow that, given current market conditions, sadly may not be able to close unless they have the top credit scores and enough money to put down.
Yes, this is gloom-and-doom, of the worst kind, but it's also real life that's simmering beneath the surface for many Americans.
Things are supposedly so bad, according to a growing chorus of pundits, that it's time for the Fed to ride to the rescue. Some of these, oddly enough, are the same people who not long ago were saying that these problems always resolve themselves on their own and that losses come with the territory. That, after all, is how the free markets work. Plenty of smart people, meanwhile, are saying the only time the Fed should get involved is if there's a liquidity crisis, which there doesn't appear to be right now.
And even if the Fed did arrive on the scene, with the exception of a brief blip, it may be too little to late. "There is no watershed solution," is the way my pal, Todd Harrison, put it in one of his missives today at Minyanville.com. "We the people have made our bed with massive spending, incessant borrowing and no saving." Amen.
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Who gets scared so easily and so often that they cause such unrealistic downturns so quickly? Or is this market tied to computer trading so tightly that a sneeze causes a snowballing disaster?
If the market is the predictor of the future, then what is one to do now after the last two weeks has vaporized earlier gains? Probably wait it out, because a smile next week sometime will be interpreted as the signal to buy now before it's all gone mentality.
As some critics have said over and over again, the stock market is legalized gambling. When one sees what has taken place in the past two weeks, whoever said the markets exist to establish order to the trading process must be scratching their heads about now.
I'm waiting to hear the answers to my questions.
Ed
I share your frustration and anger, but the answer is more complicated than program trading -- though that plays a major role in swift downdrafts. The fundamental flaw in the credit market was first described by a man named Ponzi. Mortgages are bundled and sold as a mixed bag with an attractive return on a putative price. That original price changes with the changing ability/willingness of the underlyting mortgage holders to honor their debts. But the credit market fails to indicate that changing value accurately (failing to "mark to market"). Meanwhile, the original bundles of mortgages are used as collateral for additional borrowing -- at their originbal putative face value. So you get an inverted pyramid of escalating debt bult on the foundation of an asset that is not marked to market, and asset whose value is in fact deteriorating. At some point, a kid in the crowd points out that the Emperor clothes are fast disappearing, i.e. that the value of the asset is crumbling, and the whole pyramid crumbles with it. That is horrible news for thosed leveraged into the pyramid's upper tiers. It's devastating for those who are going to lose their homes. But its not something the Fed can or should try to fix. When it runs its course, the equities market, which had nothing to do the the debacle except so far as in reflecting the values of the homes, the builders, and the morgage buyers, will stop acting irrationally and return to the normalcy of reflecting the strength or weakness of the underlying economy and the profit or loss of its corporate players. For those leveraged on equities rather than bonds, like me, the catch is that the market can act irratioinally longer than I can stay solvent. But so far its early days.
Of course, there are always people who are down on the market at any given time. bears base their negative views on problems like the housing slump, high energy prices, a rapidly maninfesting credit crunch, etc. When didnt bears make their case on factors like these, in recent years.
Sure they are right to be bearish because the housing market is weak. But they were bearish when the housing market was strong (too strong, bubble!). They could be bearish because energy prices are high. But they were bearish when energy prices were lower, the market was to fall apart at 50, 60, 70, 78, dollar oil. They could be bearish because credit is tighter. But they was bearish when credit was easier.
So bears make a different argument, every time, its like calling for rain everyday ofcourse one of those days youd be quite the prognosticator.
It’s not that they have been dead wrong on the market the last 20 years, the world’s greatest period of economic prosperity, we've had tech bubble 87, 90, 98, tech bubble. Now there are talking about, The growth in U.S. economic power and personal prosperity is a Fed-induced bubble of gigantic proportions.
Everyone can have their own opinions, but you can't manufacture facts.
U.S. GDP Growth the past two decades is real.
Net wealth in the U.S. – the total value of all assets, including stocks, bonds, bank accounts, houses and retirement funds, after subtracting debt – is approximately $54 trillion today. That's $16 trillion higher than it was four years ago. And it's nearly 10 times what total net worth was in the U.S. in 1980. American wealth is real and rising.
History shows that owning stocks, is the best route to financial independence. Dr. Jeremy Siegel, a professor at the prestigious Wharton School and author of “Stocks for the Long Run,” has tallied the return of T-bills, bonds, stocks and gold over the past couple hundred years. According to Siegel, during the period above, the same dollar invested in T-bills turned into $2,830. A dollar invested in bonds turned into $6,920. And a dollar invested in stocks turned into more than $3 million.
According to Jeremy Siegel, during the period above, the same dollar invested in T-bills turned into $2,830. A dollar invested in bonds turned into $6,920. And a dollar invested in stocks – drum roll, please – turned into more than $3 million.
In short, owning a portfolio of profitable businesses has historically given a higher return than cash, bonds or gold over the long term.
I recently read, more than two-thirds of the companies in the S&P 500 have now reported earnings. And despite a one-week, 4.9% selloff of the S&P 500 in July, “profit growth stands at more than twice the average of analysts' forecasts heading into this earnings season,” this according to Reuters.
I am a Technician (as a trader) and was a physician by profession, so i am merely regurgitating opinions of authors i read, i'd welcome responses so i can broaden my views.
People have had ample information that it was coming and buried their heads in the sand deciding to be real gamblers.
The sad thing is that for the uneducated stock investor, they were the losers. The only reason that the educated investors got bit was because of greed. No sympathy for them from me.
It'll all shake out and the good companies will still be here in the end.