Market Meltdown

[innonimatu]

The market is completely different from 2000. There were, in December 2006, 415 trillion dollars in outstanding derivatives, up from 258 two years previously (and much less in 2000).

Volatility in international financial markets can cause a chain reaction capable of leading to the collapse of most large financial institutions. Many people would argue that these contracts make the marked more stable, as derivatives are used to share risk. That's true, but what happens in the event of a liquidity crunch combined com a confidence crisis from investors? A chain reaction of defaults as banks are unable to pay on their commitments. This was what scared the ECB so much last week.

No one knows how much disturbance can the market take before the whole construct comes crashing down. But we may soon find out.

 

[Lotus49]

I would contend the statement that food and fuel prices have increased primarily due to inflation. Simply not the case. Though once again, inept and/or corrupt gov't market influence/manipulation is indeed at work in both areas. But in the end, it comes down to supply and demand. Poorly managed supply, plus poor planning, combined with increased global demand = increased prices. This inflation witch-hunt viewpoint is getting old.

 

[Whomp]

You make a great bear Mulholland. I hope you're short all the things you're discussing. The only thing is most of what you're showing is investment funds that are using considerable leverage. These are not the average investor either. They're accredited investors.

Personally, I think you guys aren't giving the rest of the globe nearly enough credit. Risks are increasing and the US may be slowing but what about the rest of the globe?

 

[Mulholland]

I would contend the statement that food and fuel prices have increased primarily due to inflation.

It's still a general increase in prices. Therefore it still is inflation, in the most real sense. Honestly I couldn't care less if the price of a 50" flatscreen tv increases 2%. If flour and milk increase 5% and oil increases 5% and on a regular basis, I start to get worried

 

[Mulholland]

You make a great bear Mulholland. I hope you're short all the things you're discussing. The only thing is most of what you're showing is investment funds that are using considerable leverage. These are not the average investor either. They're accredited investors.

Personally, I think you guys aren't giving the rest of the globe nearly enough credit. Risks are increasing and the US may be slowing but what about the rest of the globe?

What worries me is how dependent the rest of the world is on the US economy.
Btw. Thanks for the CDO explanation.

 

[Whomp]

What worries me is how dependent the rest of the world is on the US economy.
Btw. Thanks for the CDO explanation.

You got it.
Of the global economies Canada and Venezuela would be inpacted moreso that others but I think you'll be shocked how many economies will decouple from the US this time. The US will be back with a vengeance once we unwind this credit hangover.

I think mortgages will be paid as long as people have jobs. It would be pretty tough to hand in the keys.

Where the bigger risk imo is Discover cards and other credit card companies. That's a unsecured debt and receivable that won't be paid if things get bad.

When did derivatives become bad btw? Some are debt obligations with a equity, commodity or currency link.

 

[Lotus49]

No one knows how much disturbance can the market take before the whole construct comes crashing down. But we may soon find out.

That's one point of view, but another more rational point of view is that there actually is quite a lot of real, cold hard cash out there held by large institutional funds with wealthy non-panicky intelligent clients, that have been letting the bears raid further and further down in yet another case of the 'summer doldrums' (with new and improved sub-slime meltdown flavor), letting the grizzlies keep extending themselves so we can really cut them off and chew them up in the next run-up... and meanwhile there's an army of close-watching buyers creating a floor very close to current levels (today was a freebie - a gift).

It's kinda like the 1944 Battle of the Bulge situation:

“Hell, let’s have the guts to let the bastards go all the way to Paris. Then, we’ll really cut ’em off and chew ’em up.”

How much further into the Ardennes would you like to venture, Mister Bear? Make sure you bring enough gasoline for those Tiger II's (especially at these prices). Anyway, may the smart money win. I win either way, though it's overall (all accounts considered) more profitable on the long side naturally (can't 'risk arbitrage' all investment vehicles). Just means I have to get more involved, to actively compensate for other losses, if I feel compelled to do so.

I will note, however, that all my coworkers are finally capitulating and moving their money out of the U.S. stock funds, into gov't securities and some international large cap... so historically speaking (from that perspective - we're close to a bottom here). They're pretty good indicators.

 

[Merkinball]

The collapse of the subprime market is just the beginning as I understand it. People are beginning to realize that the dream that everyone will be able pay for a house at current prices is irrational. And all the investments based upon that fallacy are good for nothing. - Mulholland

So what, again, this is healthy and was needed. Anybody with half a head that knew what they were doing investment wise knew that the housing market was way, way over valued. Again, this is a great correction. I personally am giddy, because I should have no problem doing another year overseas, and building a duplex outright on something that would be less than renting in the city of Rochester. The housing market will, and should continue falling until it HITS that area where people can afford those houses. People got overzealous. Everybody knew that. It's sort of a similar situation that you had in 2000, except not nearly as serious as it encompasses a miniscule fraction of the economy as compared to what was impacted in 2000.

You say inflation is rising...no...not really. And it's not at all related to this. All other economic indicators show we have a strong economy. GDP was 3 percentage points higher than expected. Unemployment numbers continue to surprise. Consumer confidence continues to surprise.

I'm all about investors on Wall Street over reacting like this. I've got tens of thousands in cash just sitting around in the bank, or in CD's, that I'd love to pump into the market if it drops enough.

Today Thornburg Mortgage said it might have trouble with liquidity since banks may not extend them a credit line. Out of 300,000 loans only 58 are delinquent for Thornburg. It's debt has an AAA rating and specializes in Jumbo ARMs (I think the minimum mortgage is $461,000). - Godwynn

Who out there doesn't know, and didn't know, that purchasing an ARM in 2002 was absolutely stupid? Again, anybody with half a brain would realize that mortgage rates would not remain that low. When you get yourself into something that's an adjustable rate, you're just begging to get ripped off and lose everything.

When you consider how low mortgage rates were for ARM's, and compare them to historic interest rates, nobody should have gotten them. Suddenly buying a home became more attractive than renting because compared to a decade ago, you would end up paying tens of thousands less on your mortgage when it had amatorized. In some cases, hundreds of thousands.

Then, when you take into consideration that people were buying homes on mortagage rates below 4%, and now they are up to 8%...you're going down. You made an unwise investment. If I can only afford $1000 a month on a twenty year mortgage, and rates are historically low, the last thing I am going to do is buy into an adjustable rate mortgage that begins at $1000 a month. Only a fool would have thought that interest rates were going to stay that low.

It was bad credit lending. It was bad investments. It was bad decisions. It needed to be weeded out, it's getting weeded out. That makes for a healthy investment environment, especially with P/E ratios as they stand.

This market is NOT irrational. This correction was needed. This correctional is not rational. It's healthy. Just like the correction in 2000 was absolutely 100% necessary to bring us back to earth, and back to the fundamentals of investing.

 

[Godwynn]

Who out there doesn't know, and didn't know, that purchasing an ARM in 2002 was absolutely stupid? Again, anybody with half a brain would realize that mortgage rates would not remain that low. When you get yourself into something that's an adjustable rate, you're just begging to get ripped off and lose everything.

When you consider how low mortgage rates were for ARM's, and compare them to historic interest rates, nobody should have gotten them. Suddenly buying a home became more attractive than renting because compared to a decade ago, you would end up paying tens of thousands less on your mortgage when it had amatorized. In some cases, hundreds of thousands.

Then, when you take into consideration that people were buying homes on mortagage rates below 4%, and now they are up to 8%...you're going down. You made an unwise investment. If I can only afford $1000 a month on a twenty year mortgage, and rates are historically low, the last thing I am going to do is buy into an adjustable rate mortgage that begins at $1000 a month. Only a fool would have thought that interest rates were going to stay that low.

It was bad credit lending. It was bad investments. It was bad decisions. It needed to be weeded out, it's getting weeded out. That makes for a healthy investment environment, especially with P/E ratios as they stand.

This market is NOT irrational. This correction was needed. This correctional is not rational. It's healthy. Just like the correction in 2000 was absolutely 100% necessary to bring us back to earth, and back to the fundamentals of investing.

That wasn't the point of my post. Healthy companies like Thornburg are getting hit by the irrational market. Only the wealthy get loans at Thornburg and they can (and do) pay. The problem is that banks and investors are not getting a clear view of what is happening, they are letting emotion take over on Wall St. and Main St. I see no reason for this domino effect to stop anytime soon, even Wal*Mart today lowered its forecast due to weak consumer spending. I assume that it is housing related.

 

[Mulholland]

So what, again, this is healthy and was needed. Anybody with half a head that knew what they were doing investment wise knew that the housing market was way, way over valued. Again, this is a great correction. I personally am giddy, because I should have no problem doing another year overseas, and building a duplex outright on something that would be less than renting in the city of Rochester. The housing market will, and should continue falling until it HITS that area where people can afford those houses. People got overzealous. Everybody knew that. It's sort of a similar situation that you had in 2000, except not nearly as serious as it encompasses a miniscule fraction of the economy as compared to what was impacted in 2000.

So it's established that you're brilliant and will continue to be more brilliant than the people that have lost billions of dollars already. And more brilliant than the central bankers who don't care about your cash and are pumping money into a declining market to keep it from returning proper levels. Invest your money now, but be very careful, we are heading down a slippery slope and will be very surprised at what bubble pops next.

 

[Whomp]

Easy there, everyone. Remember I'm here and this has been a good discussion so let's not blow it.

 

[The Yankee]

That wasn't the point of my post. Healthy companies like Thornburg are getting hit by the irrational market. Only the wealthy get loans at Thornburg and they can (and do) pay. The problem is that banks and investors are not getting a clear view of what is happening, they are letting emotion take over on Wall St. and Main St. I see no reason for this domino effect to stop anytime soon, even Wal*Mart today lowered its forecast due to weak consumer spending. I assume that it is housing related.

Probably is. I did put in an article from The Economist some time back about how a tightening of credit may be a good thing. It may still be that, although I think they had a too-rosy picture about how much cash many corporations have taken in with record profits lately to finance expansions without needing (many) loans. But it does hit them eventually. Which means we may get a wider slowdown. My gut feeling says it won't be anything drastic, but hey, things could happen.

I would not want to see the Fed cutting the rate by 50 basis points and letting cheap loans back into the market.

 

[Merkinball]

So it's established that you're brilliant and will continue to be more brilliant than the people that have lost billions of dollars already. And more brilliant than the central bankers who don't care about your cash and are pumping money into a declining market to keep it from returning proper levels. - Mulholland

They gambled. They gambled big time. Let me ask you a poignant question. Did you get an ARM? Do you know anybody that was stupid enough to get an ARM? What do you think about adjustable rate mortgages? Are you brilliant? Or do you just posess a little common sense and the slightest understanding of economics, interest rates, and history?

Invest your money now, but be very careful, we are heading down a slippery slope and will be very surprised at what bubble pops next. - Mullholland

I'm not going to invest now. I'm going to keep money in CD's right now because it's safe and it's better than letting it sit in my checking account. Since I've been overseas I haven't kept up on the stock market, so I really don't know what specific stocks are attractive anymore. I haven't kept up on things since 2001 because I've seen no reason to invest. I haven't had capital to invest. I've had some cash since 2005, but the market hasn't been attractive, and this housing market has been waiting to burst for years now.
I said before that there's still correction to take place. I'm going to let this pan out, and hopefully by the time I get back to the states in 2008, everything will have ironed itself out, I can build my duplex on the cheap, get my next car, get the Misses over here, take some more nice vacations, and have some money left over to put into a good Fidelity mutual fund.

Healthy companies like Thornburg are getting hit by the irrational market. Only the wealthy get loans at Thornburg and they can (and do) pay. The problem is that banks and investors are not getting a clear view of what is happening, they are letting emotion take over on Wall St. and Main St. - Godwynn

So what. The market periodically has moments of irrationality. It makes for a better buyers market. Don't you wish you had invested right after 9-11 due to the irrationality over 9-11? Or black Tuesday? The market has weathered far worse in its history. Again, take the case of 2000 where billions upon billions of dollars (perhaps trillions?) pretty much evaporated in the span of a week. We recovered. Let them be irrational. It just makes it more attractive if you've been patiently sitting on the sidelines like me. What a great time to be a college student as home prices could be half of what they were just last year. The market will over correct, for reasons you've stated. But the fundamentals are still there to support a strong stock market.

Eventually, this will smooth itself out. It might take a year, but things will go back to normal.

 

[Godwynn]

The market will over correct, for reasons you've stated. But the fundamentals are still there to support a strong stock market.

Eventually, this will smooth itself out. It might take a year, but things will go back to normal.

You don't buy into the talk that a recession is coming?

I seem to always been in the wrong place at the wrong time. In early 2006 I dumped my money into a CD because I read in the local newspaper that a recession was coming because of an inverted yield curve. When I could've made 20% gains in the market I only made 4.81% in interest.

This year I bought into the stock market a week before the Chinese markets plummeted.

I am laughing more than crying.

 

[Mulholland]

They gambled. They gambled big time. Let me ask you a poignant question. Did you get an ARM? Do you know anybody that was stupid enough to get an ARM?

No but my bank was, or at least a company that my Bank invested in was.

 

[Lotus49]

You don't buy into the talk that a recession is coming?

I seem to always been in the wrong place at the wrong time. In early 2006 I dumped my money into a CD because I read in the local newspaper that a recession was coming because of an inverted yield curve. When I could've made 20% gains in the market I only made 4.81% in interest.

This year I bought into the stock market a week before the Chinese markets plummeted.

I am laughing more than crying.

Man 'recession' has been 'right around the corner' since 2004. Everyone's been skeptical of this recovery since the beginning. -And that's healthy, really. And all things considered, this recovery is going to take a substantial amount of time... so, don't buy into the 'aging bull'/'this bull is getting old'/'it's bones are getting brittle, can't charge for much longer' rhetoric, either. People that talk like that are.... well, whatever they are I guess they help keep things in balance, so you can't fault them too much, I suppose. Just don't take heed.

Global view: "It's never been better".

 

[Little Raven]

And the DOW sinks 167 to land below 13,000.

Is a rate cut inevitable at this point?

 

[Godwynn]

And the DOW sinks 167 to land below 13,000.

Is a rate cut inevitable at this point?

The futures for it is over 100%.

Jericho, what should the Fed do? Hold tight, raise, or cut? I think inflation is tame enough to not warrant a raise.

 

[The Yankee]

Probably...even if I think we'll end up with another loan hiccup in short order once the Fed holds the line after or even raises by 25 after the suspected 50-point cut.

 

[Little Raven]

If I were Bernanke, I'd hold. My grocery bill tells me that inflation is far from dead, and oil didn't sink at all despite the DOW's tumble...it went up.

But I fully admit to being largely ignorant about the dangers of liquidity loss.

edit - I just noticed that the Fed pumped another 7 billion into the banking system today. Do we really need a rate cut after 45 billion in extras?!?