Market Sinkhole Alert: Look Out Below 19 comments
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From tulip bulbs to 1929 through to Asian contagion and the dot-com boom, the bubble crash cycle can be traced back to novelty gone bad.
- Clem Chambers, ADVFN
That just says it all. He also recently said:
Hello there, trillion-dollar derivative debt markets. If in a couple of years time I’m writing a book called The Crash of 2007, the first chapter is going to be about how these marvelous new debt instruments ended up making a very large financial smoking crater of the world markets. There will be a large section on fraudulent dealings and how billion-dollar swindles were perpetrated and who got thrown in jail forever, who jumped off the skyscraper, etc.
The problem now as I see it is the developing sinkhole. Underneath the “street” there is a gigantic fizzer that has been quickly eating into the underpinnings and support beams that have been holding up the road above.
The credit crunch that we are aware of has caused many to look around at the bad decision making that has gone on over the past few years by the financial companies involved in the mortgage markets.
Then, the perceived liquidity has started to change as sub-prime lenders have been sucked up by the earth. Early this morning, BNP hedge funds announced that redemptions on 3 of their funds will be HALTED . That is bad. This is on the heals of the Bear Stearns announcement last week. NEVER NEVER NEVER tell investors that they cannot have their money back from an investment. That is a sure fire way to start a classic “run at the bank”. Just a hint of this has been enough to historically create panic. This is now surely going to be the spark that will be heard round the world.
Now for more problems; The ECB announced that they are injecting, or at least is ready to add liquidity if need be to the European markets. How much? UNLIMITED according to the announcement. This caused the EURO to slide overnight. Said another way, the EURO slide will create problems for exports.
Remember, exports have been one of the main reasons that we have seen companies continuing to show good sales numbers. Shut that down and eventually there will be an effect on Earnings.
This and the share buybacks problem is going to sink this market. It is going to swift and painful. We have moved significant money from positions in equities to the sidelines starting July 27th. Each of the “dips” did not seem to be reason to buy, rather more hints that the markets are setting up for more, much more.
Tom Gardner, Motley Fool Co-Founder commented on CNBC this morning that (paraphrase) “even though the credit problems may cause significant problems related to the financial industry. He went on to say that “there are many other sectors that will not be affected by these problems.” HOGWASH!
That is the stupidest and most irresponsible statement I have heard of late. Is he proposing that if liquidity dries up and there is a implosion in the financial sector that it won’t be felt by other areas? Bombs blow up and cause significant collateral damage. The Financial sector is the heart of the entire market and economy. The rest of the economy will surely feel it as we continue to uncover the exact extent of this catastrophe.
Now according to Dow Jones, there is a 100% chance of a rate cut in September. That is showing that the FED is still concerned about the inflationary pressures but is in need so something to help what appears to be a growing undercurrent of credit gridlock.
This is not going to be enough though as Bernanke has not been looking to stave off problems as was seen Greenspan.
We spoke of the problems with this market in several podcasts and posts. Have you been reading or even listening? This is time to reassess, move towards safety from the most aggressive of investments, bring up cash and get out of the way.The sinkhole will suck down anything above it.
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The crescendo of fear-mongering and crash calls is deafening; fear is palpable; time to add to the equity account!
;-)
Thinking about raiding the bank account for more. LOL!
Isn't the latest problem caused by Greenspan's unnecessary cut ? Why does Bernanke need to repeat the same mistake ? The financial mess is caused by those greedy lenders. They should resolve the problem themselves. One thing for sure, there will be NO BONUS for wallstreet this year.
The actions taken by the ECB today, and their stated intent, imply an awareness of a "problem" which might assume that the something which is amiss is as many orders of magnitude more serious than thought here as the difference between the funds provided by the ECB and the Fed through their market operations.
The orthodoxy is tht derivatives spread risk and permit hedging etc. The evaporation of the asset class on which the risk spreading is based, and I don't mean the mortgages but the indeterminate pricing of housing and the lack of certainty in the repayment income streams reverses the risk profile which has been securitized sold around the world and provided the basis for trades against commodities, interest rates and currencies.
It will be extremely interesting I guess to watch the discussions between major oil and gas producers and the large scale consumers of their product. At what point do "market mechanisms" which are part of the compromised derivative structure, get replaced by long term state to state deals, as people realize that while dollars are easily come by there's no longer much that can be done with them?
If you multiply the day's shares by the typical (average of OHLC) price they traded at, then about $182.38 BILLION changed hands today, JUST on the S&P 500.
Now, since the volume is up 60%, then that means that (1.60 -1 )/ 1.60 = 37.5% of the volume today was EXTRA liquidity added to the market.
Hmmm, that's $68.39 BILLION extra dollars flooding into the stock market, buying shares that Y'ALL don't want.
Let's wait a few months and see who the smart money was ...
And exactly how much money is represented by all the sub-prime loans that could possibly go belly-up? The extra liquidity represented by today's action ALONE would have bought 273,500 median homes. Not considering the extra liquidity brought into the market over the last month.
Wanna bet the whole "sub prime" deal is a little bit overdone?
If there were NO liquidity, NO money coming into the stock market, then the shares wouldn't change hands.
If there was very little liquidity, wouldn't you expect a bigger drop than 2-3%? After all, the stock market has seen 20% drops in a day, hasn't it?
If there was less liquidity now than last week, wouldn't the prices today be lower than last week's prices?
Also, since losers outpaced winners, don't you have to say that $68.39 came out of the market..
Just wondering....but good try
Andrew "Sinkhole" Horowitz
Of course banks leveraged up the hedge funds by lending to them. Some think banks could be holding say $6.4 trillion worth of hedge fund debt. That's like between 30 and 40 per cent of the capitalization of the stock market. Could be a motive for them to own some stocks for a while too.
The amounts in Europe are much bigger but the effect depends on the reserve ratios used.
We're lucky to have computers. With hundreds of billions being pumped into banks by central banks we probably no longer have enough wheel barrows to move all the money around. Good job inflation is still under control.
www.billakanodoodahs.c.../
Feel free to scare yourselves silly into selling to someone like me, or going short here. Enjoy!
When a "normal" correction would run in the neighborhood of 20%-30%, and what we currently have is less than 10%, no one should think that we are in any way, shape or form at anything near a market bottom. As I write this, the DJIA is in the 13100's, and a 30% correction from its peak would drop it below 10000. A 1987-style crash would take things down a few thousand points below that.
Or we could have a long, drawn-out tortuous decline, as we had from early 2000 through 2003.
Another possibility is that things are just peachy-keen and all the sub-prime consequences have been washed down the drain and we will resume setting new highs next week.
While I would not attempt to convince anyone to sell short at this point, neither would I be telling tham that the worst is behind us, it is "time to raid one's bank accounts and empty out one's sofa cushions for money to buy stocks". There is simply too much smoke to see the current situation clearly.
But if you want some idea of what the sub-prime problem is all about, I suggest a visit to look at this chart of home equity as a percentage of home values over time:
So we can clearly see that a ginormous fraction of home equity has been consumed by home equity loans over the past quarter century, and been spent on vacations, college tuition, credit card bills, etc etc. Most of the borrowing has been performed using some flavor of ARM, and much of that has been refinanced at least once, compounding the indebtedness as rates declined and credit was loosened. This was all fine so long as home values kept increasing and rates remained low. But what I really what to point out here is the amount of asset value that is now gone. This is the size of the sinkhole that must be filled in (metaphorically speaking -- of course there will be no "filling in", but there is a distinct loss of financial go-power in the American economy, now that it's obvious that the emperor has no clothes. The "filling in" will come from a significant retrenchment of the entire American (and possibly global) economy, and many years of rebuilding to follow.
This is not something the Fed can fix by dropping money from helicopters, nor is it over. But there is also the chance that the real action has not yet begun, and that we will move higher first. IMHO, it's not much of a chance, but as I said before, here in the smoke it's difficult to assess the state of the fire.
Whoever is investing for the [very-] long term stands a good chance of winding up with assets after 30 or 40 years. As I see it, investing requires a lot of hard work, independent research, and pragmatic smarts. And luck!