Is the End of the Crisis Near? 36 comments
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The past two days in stock market have been interesting, revealing, and puzzling.
What happened was no panic selling. Two Friday's ago, after House rejected the Bailout Pork Package, was panic selling. Prices drop like crazy, indiscriminately across the board, then rebound. But what happened in the past two days was steady, guided, sustained downward pressure. I'm sure all chartists have noticed it. And, in the closing minutes, you could almost see two forces fighting, Monday around Dow 10,000, Tuesday around S&P500 1,000. Both times the seller side won at the finish line.
Some big money is exiting the stock market in an organized, well planned, and determined fashion. This is not panic nor desperation. I don't know who the big money is, hedge funds, mutual funds, pension funds. For some reason some people somewhere need a big pile of cash. Not immediately, but in some near future.
When they're done, we'll have a bottom. It could be tomorrow or next week. But it won't be two months away.
Last April/May, I saw the subprime blow-up coming in August, no later than Sept. This April, when the market rallied after Bear Stearns bailout, I called it a sucker's rally and said the bottom would be after Sept at the earliest. Admittedly, I didn't see the full scale of chain reaction from mortgage to CDS to monolines to ARS to CP to Libor to money market funds to bankruns to disappearance of stand-alone investment banking to worldwide seizure. My crystal ball was foggy beyond CDO.
But now, I don't see any crisis ahead of us in the foreseeable future. There may be another bank or two failing. There will be many hedge funds closing -- perhaps the peculiar pattern in the last two days was a prelude to it. There will be long-term inflation.
But all the risks I mentioned above have been priced in. We have thought of all the terrible scenarios. (Heck, even CDS on US is selling at around 40 bps -- to put it in perspective, CITIC CDS spread is around 30 bps, meaning CITIC is considered a safer credit than US sovereign debt.) We're hopeless. We're ready to take the loss and move on. This means the bottom is near. I'm not sure about the prospect of strong economic recovery or bull market. If there is a recovery ahead of us, which is questionable after inflation adjustment, most likely it'll be slow -- let's hope it won't come in the form of yet another asset/credit bubble. I'm too young for death from heart-attack.
Despite all the gloom and doom, the world is not coming to an end. Factories are still churning. Trucks are still moving. Girls are still walking around in their pretty dresses. Funny thing about financial crisis is that, when it REALLY hurts, people will wake up and fix it. And it's much easier to fix than a real crisis, e.g., mass-scale drought. Even Europeans will come together and fix it. All the cash in exile will not be parked in gold-pressed platinum bars. And let's not forget the imminent surge in capital worldwide arising from lowered capital requirements, lowered interest rates, and massive, multi-national capital injection.
Yes, there will be inflation, maybe worldwide. But this is the biggest reason for people not to sit on cash. For many people, I suspect the stock market in the next year or so is their best and last chance to beat or barely keep up with the inflation over many years.
Stock position: None.
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This article has 36 comments:
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Hedge Funds need huge amounts of money b/c of year-end redemption calls!
www.marketwatch.com/ne...
Dream on..................
You could hear the hope in the voices of the talking heads this morning on CNBC. They've been asking everyday if we're near the bottom. Like you, they don't have a clue. This decline is far from over and it will last for years, not weeks or months.
Assuming they can get the credit flowing again, things will self-correct quickly. Keep in mind, technically, we are not even in a recession yet (although we all know that we are), just over 1/2 of one percent of the jobs in this country have been lost (and you would think the world had ended as a result, reading the financial news), etc. Once the treasury starts buying up the really toxic mortgages (at a fraction of their face value) which should start in another week or two, banks will start to have confidence again in each others balance sheets, credit will start flowing again, and the worst will be behind us.
Every down market we have ever had had tons of people predicting that the market will not come back, that "things are different" this time, etc. Fact is, unlike when the NASDAQ hit 5000 during the dot.com craze (with a PE over well over 50), this market was not significantly overpriced when it hit 14500 (PE was under 16), at 9000 is rapdily becoming a pretty good deal for those who are not faint of heart.
Don't be in any hurry to move back into the market if you were bright enough to get out earlier. It will be a while yet before any strong moves to the upside will be sustained.
This story is typical of today's 'We are in a small mess' belief system. What is going down isn't mere banks or mere hedges. What is collapsing in a sea of red ink is the world's biggest empire: the USA.
Both politicians running for President last night endorsed more deficit spending and tax cuts. The black hole here is wild US overspending in both government as well as import markets. The real problem is the trillions in debt the US has accumulated this last 8 years: a total of $8 trillion in red ink.
This is rising, not falling. Unlike in the Great Depression when the US was the global creditor, the US today is the global debtor. We suck in more debt at every level compared to the rest of the planet. We are facing national bankruptcy.
This is a historic moment: just like when previous empires went bankrupt, we will see wars and insurrections, maybe even a revolution here in the US. More likely, fascism like when the German empire went bankrupt after WWI. The British empire limped along on the back of the US empire after WWI.
Any commentator who ignores this important information is deluding himself. Mr. Anonymous here at Seeking Alpha is a classic example of someone who can't see the forest because his head is in the ground.
How can you say that? So far, every attempt to get banks to lend money have failed. Can you say "Financial Melt Down"? It may not happen, but it appears to be a real possibility.
Dan Kowkabany
If we're so self-centered as to let the financial system melt down this time, then I'd have to seriously reevaluate my cynicism on humanity. For now, I still classify it as cynicism.
I am still bearish on the US economy, but I believe we will get a fierce rally between now and March with the Dow rising 20% or more.
They guy is right, short of another major catastrophe, we HAVE bottomed. Listen to me and you will make money in the short term.
The reward/risk doesnt favour being short at the moment.
It's as if someone wants to make a statement and rub it in, over and over again. Doesn't make sense. But this is too big to be random.
It'd be interesting to see if they can bring Dow down to <9000 today.
> It's so easy technically to prevent the melt-down. >
Granted, a melt down is a worst case scenario, but how do we get banks to lend money if they are afraid that it wont be repaid?
Self preservation is the name of the game here. Keep that in mind as people keep telling you not to panic... That does not mean "do nothing".
A friend sent this email today, and it is worth sharing:
Remember; when you come to the edge of all the light you know and are about to step off into the darkness of the unknown, faith knows one of two things will happen; there will be something solid to stand on, or you will be taught how to fly.
Have a GREAT day.
Owen
fragerfactor.com
What happens when some of the countries who dislike us, and have been waiting for this stumble, to reduce oil output by ~20%, pushing gas prices over $5-6/gallon ++++++ ?
What happens when countrys stop buying our debt? Recalling current positions for refunding---in Euros?
What happens when most all dividends are suspended as corporations are desperate for cash? Even the "so called" rich are hurting/not spending?
What happens when unemployment crosses 10% and rising, since our economy is consummer driven? Any consumers you know spending on anything but food/clothing?
What happens to the real value of entitlement checks created out of thin air as inflation passes Carters record and keeps going--like a 3rd world country?
What happens when the foreclosure cycle rises over 5%? 10%? And nobody can qualify for mortgage, if they have the job/guts to buy?
What happens when the social unrest hits our streets in cities large and small?
ALL MADE POSSIBLE BY YOUR CONGRESSMEN & PRESIDENTS OF THE PAST 16 YEARS.................... so go out and re-elect them as your reward ---- LIKE YOU ALWAYS DO!!!!!!!!!!!!
****You can sheer a sheep many times, but slaughter it only once. America is in the slaughter house..............
IMHO!
A communist wants to be president of the US, and lots of the world's richest people would like him to be. Which part is giving you trouble?
Treason isn't complicated, people.
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10/21: The Bottom
If anybody has anything to do with financial stocks but hasn't paid attention to an "obscure" thing called CDS, while such investor should not exist in theory, now is the time for such non-existent, hypothetical investors to take notice.
Let's cut to the chase. On Oct 21, somebody A will have to pay somebody B $C in cash to settle CDS on Lehman. Estimates on C range from 100 billion to 400 billion. Group A will almost certainly include AIG, the biggest net seller of CDS, and many hedge funds, who have been using CDS selling as their cheap (HA!) financing source for the past few years. Besides single-name CDS specifically on Lehman, other credit derivatives such as CMCDS, CDS options, or Nth to Defaults, CDX indices and bespoke CDOs with Lehman in it will also settle, partially or in full.
This will be arguably the biggest cash-exchange day in human history to date. I don't care how much tax-payer's money the government will use to bail them out, somebody will fail.
Group B includes two types. One has Lehman bonds. They will be made whole by the settlement although Lehman bonds changed hands at 8.625 cents on the dollar at today's auction. The other doesn't have Lehman bonds. They bought naked CDS on Lehman. They will have a HUGE windfall -- for every dollar notional, they'll get over 91 cents. If they could collect, that is.
Back to the more immediate concern. Who is A?
You could pore over the CreditFixings' auction info and guess. I think a lot of people did just that today. They pounced on MS, GS, CS, and DB, who happen to be the biggest Physical Settlement Sellers (meaning they sold CDS on Lehman). JPM shot up the whole day, which happens to be the biggest buyer.
But I don't know how productive this guessing game is. The dealers could be placing orders and requests for their hedge fund clients. Short of serious insider info, there's no way of knowing how much of those requests are for themselves vs clients. More importantly, physical settlement will almost certainly be just a small portion of the overall settlement size. Today's auction had $5.7B sell orders. Cash settlement will most likely be at least 10, maybe 100 times bigger than that. People learned the lesson from Delphi. Furthermore, it'd be very unusual for banks to have a huge net position on CDS, with the possible exception being their proprietary desks and funds. Again, most likely suspects are AIG and hedge funds.
Now you know what the government bailout of AIG is for, the initial $85B and then the additional $37.8B (suspiciously precise isn't it?). Don't be surprised if the number goes up again before 10/21. Will tax-payers get the money back after 10/21? Fat chance. Is the money really for saving AIG or making sure others who bought CDS on Lehman will get their windfall? Take your pick.
On to hedge funds. They knew how much they would need to pay since Lehman bankruptcy. Reportedly JPM, GS, and MS have issued massive margin calls to their hedge fund clients, which is consistent with their sell requests (except JPM who, being the clearing bank for Lehman, may have bought protection) at the ISDA auction and my suspicion that a big part of their requests are on behalf of their clients. Some hedge funds are forced to cash out. And since Thursday some apparently went shorting in desperation, trying to make a quick buck before the doomsday. The 900 point surge Friday 3PM in half an hour showed how nervous and desperate they are.
In the meantime, of course, hedge fund investors must be withdrawing as fast as they possibly could, adding to their misery. Bankruptcy law will be the golden profession for many years to come.
WaMu CDS settles on Nov 7. Its impact is expected to be much smaller, although nobody can be sure, as for all CDS. We may get some rough idea on its auction date, 10/23. If there're high-profile bankruptcies on 10/21 (banks, AIG), then market would be spooked and all eyes would turn to WaMu; otherwise it'd likely be a non-event in comparison.
If there were bankruptcies of anything other than hedge funds on 10/21 (or 11/7, though less likely), then we could be in a serious chain reaction. But governments all over the world would band together to stop it. Governments may be stupid and inept, but they're not suicidal. Fed window will stay open late on 10/21. For banks (or AIG) who cannot post enough collateral, Paulson will be ready to buy stocks in a heartbeat. If the initial $250B runs out that day, they can let foreign sovereign funds to buy perferred stocks. It's a wonderful world.
Moreover, I suspect the pending doomsday is a big reason why banks have shied away from lending to each other over the past few weeks. Nobody knows how much anybody else owes on that day. Coming 10/22, assuming no banks fail, it'd be a huge cloud gone. Back to business as usual, or as usual as it gets nowadays.
Hedge funds' fire-sale exit may be creating a very rare buying opportunity in many financial markets (stocks, bonds, commodities, maybe even dreaded CDOs and mortgages). Two days ago I wondered if the bottom is near. Now I'm convinced the bottom will be around 10/21, if not earlier. The way back up may be painfully fast or painfully slow. But the crisis is essentially over unless we let the chain reaction take place.
Then we'll only have to deal with the massive debt, recession, and inflation. Piece of cake.
I think you did a spot-on job with both the published and non-published articles. One scenario I'd like to know is where would we be right now, if there was never a CDS product ever created or sold? And another is the deflation/inflation debate I keep coming across. Our government clearly has an inflationary campaign to 'solve' our problems, and I can only agree that the coming year will prove this as our dollar falls yet again.
Thanks again for the good read.
But all the risks I mentioned above have been priced in. We have thought of all the terrible scenarios. "
Care to rethink all that???? WRONG!!!!