Why is the stock market down Wednesday morning? Haven't we just averted catastrophe? Shouldn't the fears -- and shorts -- of earlier this week be unwound?
Madlen Read of the AP reports:
Stocks skidded again Wednesday, with anxieties about the financial system still running high even after the government bailed out the insurer American International Group Inc.
The "even" is the giveaway that Madlen knows that this doesn't make a lot of sense. When the US government bails out Wall Street, one expects Wall Street to rally in gratitude.
Part of what's going on, I suspect, is that there's very little trust in equities as a store of value any more -- certainly not in leveraged companies, anyway. Shareholders have been systematically slaughtered of late, whether they held Fannie Mae (FNM) or Freddie Mac (FRE) or Merrill Lynch (MER) or Lehman Brothers (LEH) or AIG (AIG) or Washington Mutual (WM) or any number of other financial companies, including even relatively strong ones like Goldman Sachs (GS) (down another $11 today) and Morgan Stanley (MS) (down 17% despite stronger-than-expected earnings).
Meanwhile, bondholders in all of those companies bar Lehman have emerged unscathed so far, and are likely to remain unscathed for the foreseeable future (which, admittedly, isn't very far). In any event, bank debt is cheap, and if you want to be long financials, it makes much more sense to make that bet by buying debt, which has a tendency to be bailed out, rather than equity, which has a tendency to be wiped out.
So what we could be seeing here is a rotation out of equities and into debt, since debt right now would seem to offer a far more attractive risk/reward profile.
On the other hand, there's no indication at all that debt spreads are tightening. On the contrary, Morgan Stanley's credit default swaps are now trading at 925 basis points, which is a very distressed level.
Does this mean that Morgan Stanley is now in the crosshairs? It would certainly appear so, yes. That alone could explain the stock-market drop: there was a brief rally Tuesday afternoon on the AIG bailout, but Morgan Stanley's balance sheet is just as big as AIG's.
My feeling is that it's high time Morgan Stanley found a buyer. Or things could get very ugly again very quickly.
This ends when some big shorts lose their shirts, and not before.
The other ridiculously overspun bear news of the day was the Treasury's bill program, to help the Fed feed more desired treasuries into the banking system. This was spun by the end of the world crowd as the Fed "running out of money", which is deliberately preying on ignorance. The Fed creates money whenever it feels like it, money is merely its debt. It prefers to keep monetary policy decisions separate from interventions, however. It is just recklessly irresponsible how that was reported.
so why don't the Fed just print/create enough memory to bailout everyone? Wall Street, Main street, everybody. $5 trillion? $10 trillion? Sure, no problem, let's just type in a few more zeros at the end and hit the magic "create money" button on the Fed's computer! What's that? They can't? So, there is a LIMIT on what they can do.
We are going on a financial water fast. We are excreting all the unpleasant tumors that have been residing in the financial nether regions.
Things are falling apart. Some say that everything is going to be alright once the housing market starts back up again. Hasn't everyone had the chance to own a house already? If they haven't failed in their bid for ownership, then their knuckles are bloody and their hope is fading with every head shot as they hold on to their homes. Hard to get a loan when creditors become less lenient. Jobs are also handy and they are disappearing like pine needles popping in a forest fire.
Are we expecting all the DINKs to get divorced and buy separate homes?
Even if you get a home loan and can afford the mortgage for a while, you still have to eat, fuel your car and have some fun. And that costs more every day too.
It is all very interesting to me. And I have lost some money myself, so I am not standing on high ground here. I just don't understand how home purchasing is going to prop the economy.
Or people could just slow down. Eat less. Use less energy. Be simple.
I do not believe that hedge funds are the culprits here, as their creditors have all but continued to allow them to magnify their exposure through leverage, therefore reducing their ability to solely create this massive bear sell off themselves.
When foreign governments invest in the US, we all just assume its long--but what if it was short? Answer: We would see volatility like we had today and yesterday.
I don't know why it's so hard for all of you to understand that shorts don't drive stable, profitable companies into bankruptcy. There's a huge amount of competition in the markets, and you don't find a lot of dollar bills that only cost 50 cents because people tend to snap those up. If shorts drive a stock down to half its true value, there are tons of value investors looking to buy that stock. If the company has articulate management with some capital to deploy, they can buy back shares or make a few insider purchases, then try to make shares scarce so that shorts can cover. Ultimately you get a squeeze and the share price rebounds back to where it ought to be.
What shorts do is hasten the end of companies that are limping along, that can't make any credible presentation to investors regarding solvency and profitability, that can't afford to buy back any shares, that no value investor will touch.
Naked shorting should be illegal because it makes no sense (selling something you don't have - take it to the options market, not the stock exchange). Now that it's taken care of, please stop obsessing over the non-existent problem of conventional shorting.