Treasury's Actions Not in Our Best Interest

Warren Buffett says, " Where others panic, you have to be greedy and where others are greedy, you have to be fearful". But he has hundreds of billions to invest, and we don't. So don't be greedy yet.

Right now, cash is king, and don't even give that a second thought. After seeing what happened over the last month, where the lifespan of a market rally fell to a session from a span of 3 days, it is best to sit on your cash and wait for the opportunities to come flood you.

In this environment, where many investors are thinking that cash is king, risk aversion begins to take over, but there is also significant deleveraging going on across the globe. So big players are raising cash and that is weighing down asset prices across the spectrum.

At some point, the markets will bottom and fear will have overbalanced on the scales. The markets will rally and all that cash sitting on the sidelines will come back into investments that can earn a higher rate of return. Just like after October 1987, just like in 1990, just like after 9/11, and just like after Oct. 2002. I still have some hedges on, and plenty of cash to weather this, but I will be ready to take advantage of these declines when I see signs of stabilization.

Now, a little commentary on the market mania. The Dow was first down 200, then shot up like a rocket, up 409 points, on the new proposals made by Paulson. He proposes that short-selling of financials should be banned, and that the US will take over bad bank debt. I think both the proposals are absolutely ridiculous. If anything, they are completely against the notion of an efficient market, where supply and demand are supposed to work in sync and decide a rational price for equities, commodities and assets.

By meddling with this scenario, the Treasury is upsetting the applecart and trying to quick-fix the terrible situation in the banking system. Make no mistake, even I have lost a large chunk of my portfolio due to the crash, and I welcome any help from the Treasury, but why now, after all the bloodshed is over? Why not in March when the first signs of this were obvious, and banks were issuing warnings every day?

The Treasury could have assumed the banks' bad debt way back in early 2008, and saved millions of people the loss of their hard-earned money which was not only in stocks, but in (supposedly) safe ventures like 401K plans. Also, by proposing a ban on short-selling bank stocks, the Treasury Secretary is essentially saying the free market theory is nonsense, and that he is going to dictate the market behavior by his unnecessary interference.

I agree that naked short-selling is illegal and should be banned, but if making money out of a company's stock when it does well is okay, so should be placing bets on a company which is clearly doomed and does not have a future. I do not see any reason why these bank stocks should get special treatment, even though they screwed up and brought this mishap upon themselves.

To conclude, I believe this is a welcome sign for many investors, who will not lose their shirt in the stock market, but make no mistake, it is a temporary fix, and will not eradicate the root cause of the crash. Now the banks have the guarantee that if they do fail again, Uncle Sam will always bail them out. And that's not good for anyone.

Disclosure: None

Comments

[investor88:]

Prashanth's advice that cash is king goes against some who say the bear market is over. I agree with Prashanth view that cash is king, we should wait for the opportunities to come flood you.

It used to be wise to anticipate opportunities but these few quarters show that Prashanth's opproach is wiser, ie do not anticipate, WAIT for proof that things have turned around for the better before taking action.

Treasury's usd700bn bailout fund looks like a good boost but Prashanth's view is that there are other things to consider like falling property prices, deleveraging. So we can only wait for the market's verdict. Until a trend develops, we can make opportunistic trades long or short.

2008 Sep 22 03:10 AM

[Lawrence J....:]

The only thing that matters in this mess is that our credit markets, fueled primarily by petrodollars, continue to operate. Every suggested solution, and every announced objection, must be measured against the possibility that we will wake up one morning unable to borrow anything from anyone. All other objections may be correct measures of the damage we have done, but that's all they are. The damage has been done: we are merely doing what we can to minimize it, but without forgetting that the best is often the enemy of the good. We must act quickly, under circumstances that virtually assure that what we do won't be the '"best" thing we can do, but will be the best thing we could have done quickly, which is really all we can expect.

2008 Sep 22 08:44 AM

[SingHash:]

The fed action merely validates irresponsible behavior on the part of lenders and borrowers alike. You don't cure an addict by giving him a few more bucks to fuel his addiction.

The point of a free market economy is that fiscal failure is punished by corporate death. Yet the same hands that are begging for alms now will be ranting against government interference and "creeping socialism" the moment they're held accountable to the public.

Disgusting.

2008 Sep 22 09:27 AM

[tiredofallt...:]

I don't see how selling a company's stock short is fair to any company. I am glad the short selling was halted- who gives Wall Street the right to push company's like Wamu and Wachovia out of business by lowering their stock so much that the media viciously attacks them over and over with the same old news?

2008 Sep 22 02:09 PM