Negative Euphoria

qdognjSeptember 29, 2008

Very good article on CBS Marketwatch this AM:

Spiro Agnew's words of the Nixon era ring true today. The politicians, pundits and, yes, the press, are nattering nabobs of negativism.

For example, in recent weeks, the broadcast and the print media have filed stories replete with scare words. You don't even have to look at the tabloids to see what I mean.

The front page of the New York Times recently described what it called "chaos" in the financial markets.

Not to be outdone, most of the first section of The Wall Street Journal one day last week was devoted to articles describing the "spreading crisis" in our economy.

And both newspapers have run stories using the word "depression" more times than I care to count.

Now, don't get me wrong, I am not saying things aren't serious out there, but another Great Depression? I don't think so.

If you look at the data, you will see more differences than similarities between the 1930s and today:

In the crash of 1929 the Dow Jones industrials ($INDU:Dow Jones Industrial Average

plunged 40% in two months; this time around it has taken a year to fall 22%.

The jobless rate jumped to 25% by 1933; it is little more than 6% today.

The gross domestic product shrank by 25% during the early 1930s; it is up over 3% during the past year.

Consumer prices fell by about 30% from 1929 to 1933; and the last time I looked they were still rising.

Home prices dropped more than 30% during the Depression vs. about 16% today.

Some 40% of all mortgages were delinquent by 1934 compared with 4% today.

In the 1930s, more than 9,000 banks failed compared with fewer than 20 over the past couple of years.

Remember also it was policy errors, not the stock market crash, that caused the Great Depression:

Instead of increasing the money supply, the Federal Reserve of that era reduced it by one-third.

Instead of lowering taxes, Herbert Hoover raised them.

And to channel whatever demand was left into U.S.-made goods, the government enacted the Smoot-Hawley Tariff Act to keep out foreign products; this only provoked our trading partners to do the same.

Add to this today's automatic stabilizers such as unemployment insurance and Social Security, the FDIC to insure bank deposits and circuit breakers to keep stocks from falling too quickly, and you can see why this is not a depression in any way shape or form.

While I am at it, I would like to take issue with the almost ubiquitous use of the word "bailout" to describe the government's rescue package.

Folks, this is not a bailout of anyone, not Wall Street, not Main Street, and certainly not the so-called "fat cats." It's an infusion of liquidity, designed to unclog the financial markets. In doing so, it will benefit everyone, business and consumers alike.

Also, the $700 billion bandied about will not be immediately handed over to the Treasury secretary; he will simply have a line of credit, similar to what the typical business might have.

Finally, this package may not even cost $700 billion. For that matter, it may wind up costing nothing. It all depends on the price the government pays for these distressed assets and what it winds up selling them for.

As for whom to blame for this mess, there is plenty to go around. In the words of that great philosopher, Pogo: "We have met the enemy and he is us

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The more you say it, the funnier it gets...

    Bookmark   September 29, 2008 at 10:35AM
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Adding to the negativity was Dubya's brief appearance during prime time....sounding like Chicken Little..."The sky is falling, the sky is falling....700 bil must be approved NOW!!!!

qdognj: "Folks, this is not a bailout of anyone, not Wall Street, not Main Street, and certainly not the so-called "fat cats." It's an infusion of liquidity, designed to unclog the financial markets. In doing so, it will benefit everyone, business and consumers alike."

Maybe...maybe not....IMO..there is a lot more to this than will ever meet the eye....time will tell.

    Bookmark   September 29, 2008 at 10:45AM
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The media can only report what the traders and investors are saying about the state of the economy and the market. Here is a less than enthusiastic remark heard on CNBC this morning as the market dropped another 300 points in the first hour:

Veteran trader Art Cashin, director of floor operations at UBS, told CNBC this morning that he learned early on in his career never to bet on the end of the world it only happens once.

Still, he said, "It might not be a bad idea to find a bomb shelter somewhere."

Now, the question we must answer is simple: Is he (and many other traders) "Chicken Little" or are we the proverbial ostriches with our collective heads in the sand?

    Bookmark   September 29, 2008 at 10:53AM
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"Someday we'll look back on this and it will all seem funny ."

Bruce Springsteen

    Bookmark   September 29, 2008 at 10:56AM
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Buy the dips,sell the rips...Honestly, i'd like to see a market cleansing..Heck, smack it down to 8k on the Dow this week, i'll be more then happy to buy shares...Heck, i'll be in at 10k...5 years from now, the market will "likley" be higher...This is an opportunity..And this is coming from someone who had been short until last tuesday...WAY too much negativity..

    Bookmark   September 29, 2008 at 11:02AM
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bethesdaman: "Is he (and many other traders) "Chicken Little" or are we the proverbial ostriches with our collective heads in the sand?

He and the traders knew EXACTLY what they were doing.

Here is an excerpt from an article that appearede in the Sunday NJ Star Ledger; a link appears below.


Let's take collateralized mort gage obligations (CMOs) since they are the easiest to understand.

Wall Street banks take subprime loans and bundle them together. These loan bundles are then sliced, usually into six pieces, which have been sorted and packaged by degree of risk. These debt instruments are then sold to various investment groups such as hedge funds, insurance companies and mutual funds.

The highest rated slice is typically "Triple-A" rated. The lowest possible tranch, typically known as the "equity" portion, or the very first part to take any losses, is un rated and often referred to as "toxic waste," because it is so high- risk. In the past, investment banks kept these equity tranches on their own books.

But Wall Street got more creative. The idea was to take unrated equity slices from a whole bunch of different CMOs and pool them together and create a brand new se curity.

That pool would then be sliced into another six pieces and sorted again by varying degrees of risk into an entirely new security called a collateralized debt obligation, or CDO. The highest rated slice in the CDO would typically be stamped Triple AAA, and the lowest was again referred to as the equity tranch and was unrated.

So now you have an equity tranch of a CDO made up of already junky tranches of a subprime mortgage-backed security. Got that?

Now we are many, many light years removed from that tangible house someone bought on Main Street.

The issuance of global CDOs rose to $503 billion in 2007 from $157 billion just three years earlier.

"You've just made gold out of horse hair," said Brian J. Battle, vice president of Precision Trust Capital Partners in Chicago. "So they have taken all the dredge and cut it up again and now they sud denly have a triple AAA rated secu rity and made that dredge salable." "

The wealthy fo Wall St. will benefit by having their screw ups wiped clean at our expense...with a plan that plunders our pockets without our permission.......and the public has no way of knowing enough about the purposely convoluted world of finance, where they make up new categories almost daily to perpetuate schemes, to equivocally asess the issues.

So......rather than ostriches with heads in the sand, we are more like victims who are at their mercy, who have been defrauded by those who did all they could to keep blindfolds over our eyes as they carried out their schemes.

Thousands lost and/or will lose their jobs, their homes...retirement savings tied to the market were and will continue to be seriously devalued, etc but note that the gov't conveniently looked the other way..UNTIL the fat cats started to feel the squeeze.

Then..and ONLY then did a demand for 700 bil to quell the storm become "urgent".

If it looks like a duck.....

    Bookmark   September 29, 2008 at 11:27AM
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qdognj-"This is an opportunity..And this is coming from someone who had been short until last tuesday...WAY too much negativity.."

"nattering nabobs of negativism?" lol.

Hey qdognj, what is your take on this story?!

September 29, 2008
Hedge Funds Are Bracing for Investors to Cash Out
By LOUISE STORY/The New York Times

First, the money rushed into hedge funds. Now, some fear, it could rush out.

Even as Washington reached a tentative agreement on Sunday over what may become the largest financial bailout in American history, new worries were building inside the nearly $2 trillion world of hedge funds. After years of explosive growth, losses are mounting and so are concerns that some investors will head for the exits.

No one expects a wholesale flight from hedge funds. But even a modest outflow could reverberate through the financial markets. To pay back investors, some funds may be forced to dump investments at a time when the markets are already shaky.

The big worry is that a spate of hurried sales could unleash a vicious circle within the hedge fund industry, with the sales leading to more losses, and those losses leading to more withdrawals, and so on. A big test will come on Tuesday, when many funds are scheduled to accept withdrawal requests for the end of the year.

A link that might be useful:

    Bookmark   September 29, 2008 at 11:41AM
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LOVE IT..... if you are not worried about the short term,a correction is a good thing!!! Where is all this $$$ going to go? savings accounts,cd's? Doubtful, as if it did, interest rates would likley fall on those accounts..back into real estate? unlikley..highly speculative stocks? about good,old fashioned businesses that have a dividend,not leveraged to any degree,value stocks? This is my best guess...old school stocks...

    Bookmark   September 29, 2008 at 12:14PM
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And that is exactly why the WSJ story today said that the bailout would slow, but not eliminate the financial decline. But time is what is needed, and it was the only way to get it. The government is the lender of last resort.

NOT acting is what caused the 1929 Great Depression and Japan's 1989 recession/stagflation.

The dollar had been strengthening, but will now weaken due to the bailout. Returns on equities will strengthen in time, but growth will be slow.

For those who are railing against Wall St. and saying that we should go back to "banking local", there is a relevant article in the WSJ today on the difficulties small banks are having, with a high likelihood of several quarters' earnings completely wiped out. This means little or no local lending will take place.

Consolidation in bad times is the name of the game. In times of crisis, Cash is King, as Warren Buffett so ably proves time and again. This is why he's been investing so heavily in the last year as the bears rule, after gradually stockpiling cash starting at the height of the last bull market.

And BTW, Buffett, like Bill Gross of PIMCO, has already said they are willing to help the government dispose of these securities without management fee, and are eager to get the chance to purchase a good amount of these securities.

IOW, the government could buy these securities, tack on their own handling fee, and resell them at a decent profit because these shrewd investors have run the numbers (unlike many politicians, apparently) and know there is gold to be mined amongst the dross.

    Bookmark   September 29, 2008 at 12:23PM
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I'm very frustrated I have to keep my mouth pretty much shut. Some of this stuff is just not an accurate reflection of reality. It contributes to people's fears needlessly. For instance,

"This means little or no local lending will take place."

Yes, some smaller institutions will struggle or even fail but the above statement is erroneous. Lending at the local level is chugging along just fine. DH's bank will make a profit this year. To read these threads one would think all banks jumped into the same boat. They did not & thank goodness they didn't!

There are thousands of strong, healthy, & profitable local banks throughout the country. They are as stunned at this debacle as everybody else.

Nothing is different at those local banks from 3 years ago. You can still get a car loan, a mortgage, a business loan & even get an unsecured line of credit. Yes, you have to qualify but that's always been the case. It infuriates me to listen to the media try to scare us into believing that lending has come to a screeching halt. It's just not true.


    Bookmark   September 29, 2008 at 12:53PM
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I are being sold in our clearly, people are getting mortgages.PNC bank has stated that their exposure in this mess is less than 2%.

There is a local bank that was started about 3 years ago by a local and very successful businessman...a number of other local business people partnered with him, and they are doing very well...IMO...the problem is overstated to a degree...the question is to HOW much of a degree...

    Bookmark   September 29, 2008 at 1:39PM
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Not to minimize the selloff today in the financial markets, believe some of it is do to the fact the 3rd quarter is coming to an end, and mutual funds want to clear their "books" of the worst performing stocks of the quarter,so when the reports go out to fundholders, they don't see the fund loaded with garbage stocks...

    Bookmark   September 29, 2008 at 1:47PM
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Well, those of you who didn't want the bailout got your wish. The House rejected the bill about 15 minutes ago and the DJIA immediately dropped an additional 500 points for a total loss of 680 for the day so far. It should be an interesting couple of hours until the end of the trading day.

    Bookmark   September 29, 2008 at 2:07PM
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Oh my, we're in for interesting times!


    Bookmark   September 29, 2008 at 2:09PM
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On the contrary, triciae, check out today's article in the WSJ titled "Small Banks Hobbled by Fannie, Freddie -
Rivals Take Over After Capital Is Hit By Big Stock Losses", September 29, 2008 WSJournal. Looks like earnings reporting over the next 18 months is going to be very ugly - and that DOES mean fewer loans in some hard-hit areas.

This certainly does not mean this is true everywhere, but that is one of the great strengths of the US - it is a very large country geographically, which is what gives it such resilience.

    Bookmark   September 29, 2008 at 4:23PM
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Well, jkom51, I can "check out the WSJ article" but I'm putting more weight on my very inside track into small to medium-sized local & regional financial institutions.

That's not to say some star-crazed CEO in San Diego didn't put his institution at risk. But folks who provide proof of income, the ability to service debt, & have a decent credit score may still obtain financing. Local banks are having more trouble getting their money on the street than they are dealing with asset/liability matching. DH's staff is rejecting 48% of all applications not because they are teetering on the edge of collapse...rather because the applicants are over leveraged with slipping credit scores. Their turndown rate is similar to other institutions of similar size & demographics (high income). Americans are just plainly tapped out.

With today's failure of the bailout bill...all bets are off. Banks that are healthy today may well not be in '09 due to increased layoffs that always brings increased divorces, medical disabilities, & skyrocketing BKs all factors in climbing delinquency rates.


    Bookmark   September 29, 2008 at 4:55PM
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For those that are interested, check out today's NYTimes article titled "With Wachovia Sale, the Banking Crisis Trickles Up".

It will be interesting to see if Chris Cox of the SEC finally steps up the plate to do something useful, like eliminate the mark-to-market accounting rule or at least, suspend it.

Tricia, I don't necessarily disagree with you. But many of the people I know do not necessarily have the most sterling credit scores, nor are they really secure in their jobs, despite their best efforts. My DH and I are fortunate we are affected very little, but there are many people who are struggling to manage. It's not going to take much to tip them over the edge.

I believe there was an article yesterday that banks are starting to reduce credit card limits. Not that I think that's a bad thing, but it will undoubtedly cause more stress on those who may least be able to afford it.

US Bancorp just raised our credit card limit, so I have no axe to grind about our credit worthiness. But a lot of folks are not so fortunate, and I won't be surprised to hear in the next year or so that some of our friends and/or family might be having a really hard time.

    Bookmark   September 30, 2008 at 12:34PM
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Interestingly enough, Wachovia is not as "poor" as it would seem..which makes one wonder just how overhyped this whole issue of "bank failure" actually is...


"Wachovia Corporation to become a focused leader in retail brokerage and asset management.
CHARLOTTE, NC, September 29, 2008 -- Wachovia today announced intentions to sell its retail bank, corporate and investment bank and wealth management businesses to Citigroup. Wachovia Corporation will remain a public company with two main operating subsidiaries: Wachovia Securities, the nation's third largest brokerage firm, and Evergreen Asset Management, a leading provider of asset management services......."

    Bookmark   September 30, 2008 at 6:17PM
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