Tack

How the AIG Bailout Scuttles the Chance for a Second Stimulus

I beginning to think that "uber-lib" Krugman is going to have some kind of mental breakdown, or perhaps a stroke, if he can't conjure up and get adopted some new form of government-boondoggle spending.

Doesn't matter how much it is or on what, just spend!

CDS Regulation: Just One Simple Rule

Tom:

Perfectly, accurately stated.

I'd even add an addendum to the "one rule:" that CDS issuance be limited to the amount of the insurable interest. That prevents even a holder of an insurable interest from "overinsuring" the potential loss, thereby creating the same incentive for failure that exists now.


On Nov 09 05:31 AM Tom Armistead wrote:

> CDS levels affect the perceived creditworthiness of a company and
> their cost of funds. Financial companies that rely on credit can
> literally be put out of business by these perceptions. CDS were widely
> used in conjunction with naked short-selling in short and distort
> manipulations to take down financial firms leading up to the meltdown.
>
>
> Naked CDS are gambling contracts, and contrary to your apparent belief
> system Wall Street is an inappropriate location for a casino operation.
>
>
> Lack of insurable interest creates a motive to cause a loss - something
> that can be done be spreading rumors. The exemption from regulation
> of CDS was a primary cause of the financial crisis.
>
> The correct "one rule" is a requirement of insurable interest: you
> have to own the bond in order to buy the insurance.

ING Shows How Bank Dismemberment Is Done

Regardless of whether one favors or disfavors bank dismemberment, it's pretty obvious that the market has concluded that ING will be a much less effective financial institution on an international scale than previously. Such a "wonderful" development, if accretive, isn't rewarded with a Niagara-Falls-like 25+% decline overnight.

Even as an past investor in ING common shares holder of some of their debt, I'd have to conclude that the market has sized this situation up correctly. For all the moral sanctity awared ING's action by critics of present bank structures, the reality is that unless there is wholesale worldwide similar action on every large multinational bank, those that are forced into such action (as ING was by the government) will be at a serious competitive disadvantage versus other institutions that remain financial conglomerates.

Those institutions will have funding, income-source, diversification and other advantages that narrowly-defined banks will not enjoy, similarly to how large money-center banks now dominate business over regional banks, whose business is more limited to one sphere.

So, while anyone is revelling in this development as a "win for the good guys," one might want to separate that from their enthusiasm for being an investor in such an entity, unless one wishes to do it for moral rectitude, rather than profit.

The Dow: Ominous Parallels to the 1929-1930 Era

Many posts (this thread and others) make reference to whether the market is gaining or falling in "real" terms, as if this means anything to an investor. This is a distraction.

The reality is that investors can only seek to maximize nominal gains because they have absolutely no control over inflation-adjusted "real" gains/losses.

Counterparty Risk Falls Further

Good points.


On Sep 25 12:17 PM Mad Hedge Fund Trader wrote:

> You really see this in emerging market bonds. A number of readers
> have asked me tocome up with a safe, high yielding investment in
> which to hide out incase the equity markets swoon again. That means
> they are looking for a security that offers a high fixed return,
> denominated in a strong currency that will benefit from future upgrades
> that will boost theprincipal over time. All of that is another name
> for the Invesco PowerShares Emerging Market Sovereign Debt ETF (seekingalpha.com/symbo...).
> The fund has 40%of its assets in bonds issued in Latin America and
> 31% in Asia, with the bulk of the maturities exceeding ten years.
> The two year old fund now boasts $340 million in market cap and pays
> a handy 6.42% dividend.This beats the daylights out of the nine basis
> points you currently earn for cash, the 3.40% yield on 10 year Treasuries,
> and still exceeds the 6.42% dividend on the iShares Investment Grade
> Bond ETN (seekingalpha.com/symbo... buys predominantly
> single “A” US corporates. The big difference here is that have a
> rosy future of further creditup grades to look forward to. It turns
> out that many emerging markets have little or no debt because until
> recently, investors thought theircredit quality was too poor. No
> doubt a history of defaults in Brazil and Argentina in the seventies
> and eighties is at the back of theirminds. With US government bond
> issuance going through the roof, the shoe is now on the other foot.
> A price appreciation of 125% over the past year tells you this is
> not exactly an undiscovered concept. Still,it is something to keep
> on your “buy on dips” list.

Four Reasons We're Headed Even Higher

It always helps to state facts, rather than nonsense.

Rather than 90% bullish, the current sentiment is only 34% bullish and 48% bearish, a particularly good contraindicator against any collapse and a rather bullish signal, in fact.

Check for yourself: finance.yahoo.com/news...


On Aug 31 11:59 PM [e-mail] wrote:

> The markets were designed by insiders for the benefit of insiders
> at the expense of outsiders. In the face of top and bottom line headwinds,
> why will the insiders stay long when they can take their profits?
>
>
> There are no good shepherds: they fatten the lambs and sheep to shear
> and eat them.
>
> As investor sentiment approaches 90% bulls, being claustrophobic
> and disliking crowds, wouldn't now be a fine time to take money off
> the table and sit on the sidelines watching the mania on light volume,
> few advancers vs. decliners, and markets bumping their heads against
> resistence lines?

Four Reasons We're Headed Even Higher

Artful:

One of the most well-reasoned and best-presented pieces of logic I have encountered in the "sensitivity group" that is otherwise known as SeekingAlpha.


On Aug 29 12:53 PM ArtfulDodger wrote:

> JS and Fellow Investors:
>
> I personally don’t spend five minutes a year trying to figure out
> which way markets are going and don’t really relate to doing it.
> I don’t really care either—for the most part. Crashes such as we
> saw last year are few and far apart; as a rule they simply don’t
> come piling on top of each other.
>
> As I’ve written before on this site, I was once a very foolish boy
> (now I’m a foolish man), and back in the 1980s when the CBOT began
> futures trading on indices, I jumped in thinking I could predict
> the day to day machinations of markets. After only a few days I realized
> my vew was fallacious. I continued to trade for about four years,
> but never again grew the hubris to think I could predict market direction.
>
>
> Therefore, I don’t usually read articles that predict market direction,
> but there are so very many negative articles on this site that I
> decided to read this positive one.
>
> I will say that Mr. Schwarz’s points are valid, especially this one:
> The DOW was around 8400 when Geithner came stumbling out of the blocks
> and Obama was strafing the economy every time he wagged his tongue.
> The DOW dropped 2000 points before Geithner could find his tongue
> and Clinton told Obama to nix the negativity—this was indeed a move
> that had nothing to do with the economy or business. That 2000 point
> move was thus no more a move back to normalcy.
>
> That said, let me also say that at this point the majority of stocks
> I’ve checked out recently do not fit my criteria for buying—but I’m
> a picky, tight son-of-a-batch. So because I can’t find something
> to buy doesn’t mean there’s a crash coming.
>
> I am invested mostly in China and Brazil, with only a few US companies
> in my coop. The problem I see with most businesses in the states
> is too much debt. This came about in my view mainly because of high
> corporate taxes—which
> are not going down.
>
> Some companies are indeed working their debt down. Others, such as
> GE, have added massive amounts of new liability to their books. This
> is why GE’s boss, Jeffrey Immelt, is pushing for a bailout of sorts—urging
> the government to pass the Cap & Trade Bill which will strongly
> benefit GE.
>
> Three of the US companies I own, GD, FWLT, and FLR have stable long-term
> contracts that guarantee them gracious earnings for years out from
> here. Shareholders should be well rewarded, in my view.
>
> The other two, JCOM and GRMN, have pristine balance sheets, keep
> bringing the bacon home to momma year after year, and have products
> and/or services with potential world growth.
>
> I have reasonable profits in all of these, but I’m not selling them,
> shorting them, or putting stops in on them—not matter what anyone
> says, unless there is drastic monetary or fiscal policy change.<br/>
>
> I urge investors (particularly new and young ones) to learn to search
> and find companies of this type, buy them when they’re down (or out
> of favor), and give them a chance to make you some money.
>
> You’ll be much the better off doing this than trying to pick market
> direction.
>
> Thank you for this article, JS, and your work.

Four Reasons We're Headed Even Higher

On Aug 30 12:33 PM Jan Paul wrote:


>>Look at this total debt chart for then and now. Notice that total debt didn't peak until 1932. Many thought borrowing a little more might get them through the worst of times until recovery began. Do we face that again with people maxing out credit cards or doing other things thinking "this will end soon?"<<

In fact, consumers and business have been paying down debt. That's principal reason why banks can't expand lending, not the supposed refusal to lend to this or that deserving borrower that the popular media likes to tro out on the evening news.

>>financialsense.com...

Notice in that chart how long it took to get debt down to where people started spending.<<

Absolutely the opposite of now, the money supply was contracted from 1929 to 1935, and only returned to 1929 levels by 1939. That's ten full years of reduced and/or stagnant money supply. No wonder we had catastrophic deflation and inability to pay down debt. It's not remotely comparable to current policies or their likely effects.

>>Speaking spending. Consumer spending was normally about 62-65% of GDP. Only massive use of debt allowed the consumer to go to 70-71% of GDP. That day is never coming back. We will be lucky, after a period of over correction, to come back to 62%. That drop in sales tax revenues and profits and tax revenues from profits will kill government budgets for years to come.<<

This, too, will prove wrong because the effects of massive increases in the money supply will amplify the consumption values that apply relatively to GDP. Granted, this will be inflationary, but the reality is that one can only invest to maximize nominal gains.

>>The Fed is reported to have said in a recent meeting, "no net new jobs for five years" which sounds about right for this credit recession or depression. <<

The path that the economy takes will not be (and never has been) controlled by job stats at the margin. The economy will be controlled by the spending habits of the 90+% with jobs, and this behavior will improve far sooner than jobs are added back.

>>Also, regarding inflation and deflation. Deflation in asset prices, yes. Inflation? That will be driven by global economic forces, not by us. We import raw materials and goods and it will be global demand and the spending of dollars on commodities (that many nations are trying to get rid of) that will determine our prices even if we are in a depression deeper than the 30's.<<

Which is it, deflation or inflation? Can't have both. In fact, the entire world has inflated their fiat currencies and we'll see worldwide inflation. The recently popular myth that the rest of the world would prosper while the U.S. declined -- a new paradigm, if you will-- has already been debunked, as world economies, China included, contracted as swiftly as we did. And, either we'll all recover, or we'll all wallow together. Given the huge monetary expansion, recovery, at least as measured in nominal terms, seems unavoidable.

>>If the global recovery is an illusion then even commodity prices will fall and the dollar may even appear to rally compared to other currencies. Bottom line, however is that our government is no longer in control of the dollar and its fate and thus, it is no longer in control of whether or not we have inflation in prices.<<

Contrary to popular "new thinking," as soon as other world economies started to falter, money fled into dollars, exactly as has happened in the past. Another instance of the wrongheadedness of "this time it's different." Granted, if the world were to sink into some complete mental funk and worldwide depression, yes, asset prices would fall worldwide and the dollar would soar. I sure wouldn't want to make that bet, though, given the currency-printing proclivities of modern governments.

>>Food is another issue. There are already rumblings we are facing food shortages globally with the rapidly rising population. Canada has had record crop loss filings. Southern Hemisphere crops have been hit. A wheat rust has hurt Africa and the Middle-east wheat crops.<<

You have to be kidding. Tomas Malthus was proven wrong 211 years ago. Food production is at record levels and expanding faster than population. Economic and distribution issues will assure thatthe poor and hungry are always among us, unfortunately.

>>Thus, our food prices could rise a large amount even though we are in a recession. There are so many things going on that it is very difficult to predict where the markets OR prices will go but, fundamentally, nothing is looking good for the U.S. even if we have global recovery. Our policies are based on flawed monetary and economic theories that we have used for over 70 years.<<

Prices, of course, will go up. The U.S. and othe world governments have been expanding currency fatser than GDP for many decades. It's the nature of the beast. Inflation is the one sure things that can be bet on, like the sun coming up, or aging, even if we have occasional temporary pullbacks.

It's amazing how so "flawed" a system and policies could have produced such an expansive and emulated economic system over the last 70 years. Even now, while pessimists decry things, there's no sign of anybody abandoning the dollar for any other currency, or even making much of a rush into gold.

In summary, the folks who bet against world recovery, including --in fact, driven by-- the U.S., are going to be left at the station once again.

Four Reasons We're Headed Even Higher

No wonder the "average Joe" can't make any money in the market. We've been at one of the greatest pullbacks in market history, and rather than seeing any buying opportunities anywhere, Joe concludes that things can only get worse and worse and that money is best placed in a mattress.

Of course, given the long history of inflationary policies of all world governments (Japan soon to follow after today's election), having one's money in "safe" investments or cash will be the absolutely worst place one can be.

Speculative Trading Indicates Rally Losing Steam

I just have to chuckle every time I see Japan mentioned as a harbinger of where the U.S. is headed, talking about how they haven't been able to inflate their way out of the economic downturn and how their own "zombie" banks are just like ours will become. It's abundantly clear that people who makes these comments know next to nothing of the Japanese economic and banking system.

Japan collapsed in the 1991 realty bust, which on the surface seems similar to our current path, but it's not. In Japan, unlike here, there's a long history of cross-ownership of shares by corporations, including banks. This was all fine, when the various share prices were expanding, but caused havoc during the market decline. Further, because the values of many assets on their banks' books are merely the ownership of other similar interests, there's less underlying hard assets to support the values or lead a resurgence in value. This is very different from the structure of our banking system.

Secondly, the Japanese have a long history of conservatism, both societal and governmental, so they have been loathe to engage in any meanigful simulus efforts and have relied on the economy picking itself up by its own boot straps, so to speak, hoping that would occur by keeping interest rates near zero. Obviously, this has not inspired Japanese commerce.

Additionally, the Japanese people are not consumption oriented and have the highest savings rate in the world, further reducing monetary velocity. This is about as diametrically opposite the American mentality as it gets.

Lastly, in the last 20 years, Japan's bread and butter, the engine of its growth, the export business, has had its lunch eaten by Korea and China. This, more than anything, explains Japan's economic and market woes. The indigenous population is too small and too conservative-minded to drive interal growth on a massive scale, so by failing to remain competitve in exports, Japan has suffered incalculable damage.

Interestingly, as I type this, Japan's ruling party for almost the entire post-war period has suffered a crushing defeat at the polls and will be repaced with a very liberal party that will likely try to emulate the more socialistic and government-spending policies of the U.S. and ther European countries. It will be interesting to see how this works in Japan and how their stock market reacts to this election result.

In summation, forget comparing the U.S. market, economy or banking system to Japan; they could not be more different historically, structurally or in mentality.

On Aug 29 06:06 PM Nathaniel C wrote:

> It seems the only argument that the bulls have is that the FED will
> inflate the economy and that the stock market will simply go up becasue
> of dollar depreciation. This overly simplistic argument is flawed.
>
>
> QE has never worked during debt deflation. Look at Japan, they printed
> money and it did not work. According to the taylor rule they should
> theoretically be printing 10 trillion to avoid debt deflation.<br/>
>
> Also the bulls place to much faith in Bernanke. The same person who
> said their was no housing bubble, subprime was contained, fundamentals
> of the economy are sound, etc. Now he says the crisis is over and
> the economy is recovering. Who can believe a person with such a bad
> track record?This guy needs to go back to school to better undertand
> economics.
>
> Finally, remember that the FED and the government cannot decree economic
> growth or prosperity.

The Lunacy Surrounding AIG's Stock Price

You don't need to examine facts, fundamentals, outlook or the benefit of all that government investment to assess share-price movements; you just need to know it's "Evil AIG." If it's going up, it must be wrong, unfair, ungodly, conspiratorial, insane.......

Mommie, make it stop!


On Aug 28 03:39 AM jamieentrikin wrote:

> If you divide AIG's near $50 share price by 20 you'll arrive at a
> pre-reverse-split equivalent price of $2.50. In what way is this
> outrageous?

Four Reasons We're Headed Even Higher

Mark Alexander says the market's going higher, and you can't find a "catalyst" for a correction, but it's one of the "dumbest articles." Let me get this straight: I see, you agree with him, in fact, but it's dumb. Very novel thinking and logic, indeed.

Also, the notion that "savers," the kind of terrified, disenfranchised types the bears and pessimists refer to, are, also, responsible for the market's advance because they're plowing their "savings" into the market is, likewise, too funny for words. Their money is in savings accounts, money markets or coffee cans.

As someone previously commented, the unbridled pessimism and cynicism demonstrated here and in many other posts is a sure sign that the amrket will advance. The "cw" is usually wrong, and the more people that believe it, the more "cw" it becomes.

Four Reasons We're Headed Even Higher

Archman, If you really believe what you just wrote, you better start investing in new luggage and search escapeartist.com for a new country of residence because the government will be coming to take all your prudently-managed gains away from you and give them to the howling lynch mobs in the street, who will be clamoring for scalps.

Populism always demands the scalps of the successful and the prudent. And, placing self-preservation before morals and ethics, the government will oblige.

Four Reasons We're Headed Even Higher

"We're headed" is wrong (as in incorrect?) "grammer" (sp)?

Reminds me of Mark Twain: "Better to remain silent and be thought a fool than to speak and remove all doubt."

On Aug 28 01:02 PM aa44aa wrote:

> The title of your article should be "I can only come up with 4 subjective
> reasons (without any data, just personal opinions) the we might be
> heading (not we're headed, wrong grammer) even higher"

Four Reasons We're Headed Even Higher

Too funny. Almost too recently to mention the "smart traders" were saying that the SPX couldn't penetrate 880. Then, it was 940. Now, it's 1040 that's "magical."






On Aug 28 12:21 PM Per wrote:

> This is probably the worst time *ever* to invest in equities. Any
> smart trader / investor has been selling into this top.
>
> Folks, we are in a bear market rally in a secular and cyclical bear
> market. Just watch how the S&amp;P is rejecting 1,040 for the nth
> time. Breaking 1,014 will get us quickly to retest 980.
>
> Disclaimer: Short S&amp;P and long short financials.