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Matt Blackman
172 Comments
It's a Bull Market in Government Intervention
The challenge as I see it is the government minions are blowing the wad trying to save Wall Street. Unfortunately, they are simply passing along the liability to taxpayers, kind of like what happened in Japan in the early 1990s after their meltdown (that is still underway).
The problem is that as the recession worsens, Main Street will be next, consumer spending will fall as more get laid off and the economy weakens. Given that the Fed and government have now discouraged foreigners from investing in Treasuries see tradesystemguru.com/im... who will be left to bail out Main Street amid rising interest rates?
Size Alone Isn't the Key Issue, It's All About Connectedness
Trust you to refer to Wikipedia as a source of financial information. According to a reliable source, the International Swaps and Derivatives Association, Credit Default Swaps at the end of 2007 were not $45 trillion, there were $62.17 trillion CDSs.
The much bigger problem is the size of the overall Over the Counter (OTC) derivative market which was $596 trillion at the end of 2007 and still growing rapidly.
As to the net value of these contracts today due to "self-canceling&q... of contracts, is that your own invention? It is certainly not supported by the data which shows (as of March 2008), that the OTC derivatives and CDS markets are still expanding.
Relying on theoretic mumbo jumbo to re-work regulatory regimes may seem interesting to you and a few other supercilious academics imbued in the delusion of their own importance, provides no real guide in solving this mess.
In future, before you try to impress us with seemingly esoteric theories, at least do us the courtesy of using reliable sources...
Banning 'Terrorism'
That the Brits banned short selling, not simply naked short selling that is effectively counterfeiting), but all short selling for a minimum of four months for London markets is extremely short-sighted and frankly stupid. (Goes a long way in reinforcing the truth behind the joke that government intelligence is an oxymoron doesn't it?)
But if Cox, after failing to enforce RegSHO rules for more nearly three years now decides to add all short selling to the list of illegal activities only days after finally acting to enforce naked shorting, is simply foolhardy...
Attacking speculators in currency markets in London for shorting the pound in the early 1990s and then in 1998 when Malaysia blamed currency speculators for the drop in the ringhit (which also instituted a similar ban) turned out to be a fiasco in both cases. It impedes markets and sets the stage for a bigger failure.
For example, how will regulators again allow short selling without causing a stampede on markets?
Short selling provides a necessary ability to place bets on lower prices, which is necessary to offset the buy-side bias in markets. But making myopic decisions under pressure I guess is part of the panic process.... Too bad.
Playing for a Bounce?
www.cato.org/pubs/regu...
Playing for a Bounce?
www.sec.gov/comments/s...
Playing for a Bounce?
Interesting article but it is clear from your last comment on the SEC's recent action "banning" naked short selling that you do not understand what naked short selling is. It is ludicrous to make the statement that by banning the practice which was "banned" in January 2005 with the Regulation Short Sales rules (RegSHO) that the government is "making it illegal for stocks to go down."
However, for some reason, the SEC decided not to enforce the RegSHO rules until recently.
Naked short selling is the destructive practice of selling a stock short without having to first borrow it like everyone with the odd exception of market makers, brokers and hedge funds have to do.
This action by the SEC does not "make it illegal for stocks to go down" as you state, it makes it illegal for those who short stocks to do so without having to first borrow the stock. This practice by the way, effectively allowed those few players the ability to counterfeit the stock which hurts everyone. I explained naked short selling in my March 23, 2007 newsletter at tradesystemguru.com/co.../
There was an excellent 25 min documentary done by Bloomberg in March 2007 entitled Phantom Shares that everyone should watch (which hopefully still works). The link can be viewed at the bottom of the page at tradesystemguru.com/co.../
I don't dispute the fact that with its recent action the government has crossed a dangerous moral hazard threshold in socializing markets but let's not start making charges that simply aren't true.
Five Challenges Ahead as the Corporate Soup Lines Grow
I wish you luck because history is not on your side. I have done some fairly extensive research on the election cycle and the two years after a US election are hard on all markets and stocks pretty much world wide. The ratio for the Dow/SPX since 1902 works out to 93% of the gains occurred in the 26 months leading up to each election versus just 7% in the 22 months after. As well with the exception of the relatively short-lived Oct 1987 meltdown, every single major bear market and recession since WWII has occurred in the 2 years after a US election. The ratio of the Toronto TSX for the 2 years pre-election versus post-election since 1950 is 97:3 or 32:1. Not a very attractive probability (see tradesystemguru.com/co... )
Lehman's Collapse: Broader Economic Damage Unlikely
At this point, the Fed and Treasury have shown they have little idea what is going on and even less ability to do anything about it. As far as economist and investors, many are still living in denial and continue to religiously put stock (pun intended) in the traditional economic indicators - most of which have been rendered useless by statistical meddling.
As to calling bottoms; if you keep calling them often enough, you will eventually be right. The only problem is by then your credibility will be completely shot and your portfolio (assuming you've been trading or investing on your own advice) in similar shape.
I outline the macro challenges that I see lie ahead in seekingalpha.com/artic... the greatest threat being that we are in a period of the unwinding of the greatest number and scope of asset bubbles in history... Such periods have ended neither happily or quickly.
Five Challenges Ahead as the Corporate Soup Lines Grow
Good job though and an interesting analysis! So are you giving away Cramer's book for giggles and laughs?
Five Challenges Ahead as the Corporate Soup Lines Grow
However, my primary approach to markets is technical: I watch the charts, take a quick look at the fundamentals to see if they support the trade and make my buying and selling decisions accordingly...
But you bring up an interesting point. Larry Williams once said in a seminar that he is pessimistic every time he enters a trade, and he expects to lose. That way he won't overstay his welcome and ignore his stop loss. In other words, if his trade hits his stop, he quickly exits and doesn't ignore the signal because that is what he is expecting..... Its counter-intuitive when you think about it. Traders by nature are generally optimistic. But that can keep you in a trade longer than you should be and bankrupt you.
Nukldrager - Good point. I need to check the latest BIS (Bank of International Settlements) derivatives data. The problem is that is lags by about 6 months. But from the data I have been seeing, the size of the derivatives market began shrinking in late 2007.... Will take a look at it an do an article update when I have the info....
Cheers,
Matt
Case/Shiller Index: Are We Close to a Bottom?
1) It covers pair sales data for 20 cities only. It does not track housing prices in rural areas that have not been as hard hit and generally lag metropolitan home price declines.
2) The CS HPI only tracks existing home prices, not new homes.
3) Foreclosures are still rising rapidly. As of the latest RealtyTrac data there were more than 303,000 foreclosures in August up from an average 247,000 per month in Q2-08. This will not have a positive impact on prices and will also negatively impact the CS HPI.
4) The C-S HPI does not look at the state or direction of the economy. It is deteriorating which will lead to increasing job losses and lower consumer spending - both negative factors for the housing market nationwide.
I find it interesting that Chip is saying the relationship between incomes and house prices are returning to normal. That is not what my research shows.. see seekingalpha.com/artic...
The problem with bear markets is that they are punctuated with often powerful bear market rallies but these eventually fade and the asset class then puts in a lower low.
Could the improvements that Case, an economist not a market expert, is seeing be evidence of a bear market rally?
No Conspiracy Behind Tumbling Commodities
To suggest that the commodity correction was somehow orchestrated by authorities to shore up financial stocks is at best misguided for a number of reasons. 1) Bespoke Investment Group research shows strong correlation between commodity and equities prices in line with the study of intermarket relationships. More often than not, commodities corrections accompany stock market corrections. To suggest that a drop in commodity prices would cause a rally in financial stocks shows an ignorance of how markets work.
2) If government authorities were actually capable of manipulating commodity prices to that extent, why did they let oil prices rise to $147/bbl in the first place? I agree the governments do their level best to manipulate markets in an attempt to get re-elected. It is the reason there is such a powerful 4-year election cycle (see tradesystemguru.com/co... ) But even it they had the ability, driving down commodity prices will contribute to a slowing economy and falling stock prices over the long haul, not help them if history is any guide.
The more likely explanation is that thanks in part to the US easy money policy from 2001-2004, we had a number of global bubbles form including a commodity bubble. All bubbles eventually burst and burst violently and that is what is happening now.
Weekend Reading: Evil! Speculators! Edition
Markets around the world, no matter where they are or what assets are traded, are subject to periods of greed when everyone trips over one another to buy at any price temporarily driving prices into the stratosphere. Its called a bubble!
We have just come through a period in which we had the greatest number and scope of asset bubbles in history.
Then comes the realization that prices have risen too high. Everyone panics and dumps these assets at whatever price they can get. Its called a bear market or crash. Such periods have never had a happy ending as prices revert to below trend.
So the answer is to have the government try to stop both through even more regulation? Governments are inherently inefficient and can't even handle the basics without screwing things. Governments may be a necessary evil but it is an undeniable reality that the bigger governments are, the more evil they become. So we hear cries to give them more power to run markets and the economy too?
Bubbles are in part inflated by inaccurate government data that make the market or asset look more attractive than it really is. How do they do this? Manipulating economic statistics and keeping interest rates artificially low are two good examples. We saw a great example of this from 2001 -2004. It is a result of the current administration or governing party manipulating the data to make it look better than it really is. Both parties have been equally guilty.
Why? This practice in of making the economy look and feel better than it really is has one purpose and that is to get re-elected. Why do you think the election cycle is the most powerful cycle in markets? (See tradesystemguru.com/co... ) Like gravity, it is a reality that traders and investors had better appreciate or they will pay a heavy price.
Regulation is necessary but it is foolish to think that governments can regulate bubbles and busts away with more regulation. And it is those with the poorest understanding of markets and the economy that promote these ideas every time there is a bust.
If they truly understood the process, why are these same people silent when bubbles are in the process of forming? Wouldn't that be the best time to deal with the problem before the bubble burst?
Passing rafts of legislation after the bubble has burst not only shows a complete lack of understanding, it is too late to do anything about it.
Too Much Fiddling with the GDP
Just How Much Can the U.S. Government Guarantee?
Has anyone done any estimates on how much this recent bailout could cost the taxpayer under a number of different scenarios? For example, if national home prices level off, drop another 10%, etc?
The market rallied on relief but this relief has the potential to turn to fear if the home prices are not at or near a bottom which seems to be the general Wall Street consensus...