The Death of the Long Term Trade
Oct 20, 2008
Posted by Jody Eisenman | Filed under crisis
No matter how these markets look a year or two from now, one thing should be abundantly clear to any investor. When one sees market stalwarts like General Electric, Morgan Stanley and Cisco lose over half their value in less than a year (not to mention disasters like Lehman, AIG, Bear Stearns, Washington Mutual and Wachovia), with investors losing most or all of their gains for the past few years in a period of weeks, we can safely say that the old strategy of “buy and hold” no longer makes much sense. Even bond holders have seen substantial losses, at least on paper. Today’s investor needs to take a much more active role in their portfolios in today’s volatile environment. I will speak more on this in a few days.
In other news, although the credit markets are still easing slowly, the municipal bond market is still very tight. Most institutional investors are reluctant to buy right now, forcing municipalities to rely on individual investors to buy their bonds. Although yields are rich compared to several months, and bond salesmen like Lebenthal are hawking bonds to individual investors, I would continue to remain cautious as long as the biggest part of the market (institutions) are staying away. In many cases, municipalities are faced with the unpleasant prospect of either delaying a new offering for awhile (something many cities and states are hard pressed to do given their immediate cash needs) or floating bonds at interest rates that are way above what they budgeted for.
Merrill Lynch believes many European banks are in trouble. According to a recent report, they think several large European banks (such as Paribas, Barclays and Deutsche Bank) may need to raise around 100 billion dollars in order to maintain their capital base. Although most European governments have been offering a huge amount of financial assistance, the scope of these problems are far above what anyone has previously contemplated. Therefore, there is concern about how far the governments can actually go before creating a possible inflationary scenario. I will try to speak about this later this week as well.
I will leave with some quotes from the NY Post about an equity trader:
Joe Mazzella leaned forward and pored over the stock data blinking on the computer screen in front of him. With a few minutes to go before the markets opened on Wall Street, the trader psyched himself up for another wild ride.
He described the frantic pace his colleagues have seen the past few weeks as “going like the hammers of hell.” Fast-paced markets with huge swings have become commonplace – but that doesn’t mean traders aren’t anxious.
Mazzella, a trader with Knight Capital Group, shifted uneasily in his chair. Last week, the Dow had ended an eight-day losing streak that had sliced 2,400 points from its value, and Monday it surged a record 936. Tuesday was a relatively mild day, with the blue chips falling just 76. Now, with trading about to begin Wednesday, it looked like another bad day was at hand.
Just seconds before opening bell, the noise level in Knight’s Jersey City, N.J., trading room ramped up, with traders barking last-minute orders over loudspeakers. When the bell sounded, it was met by something unexpected – silence.
“That’s scary, it’s too quiet in here,” said Mazzella, a managing director at Knight Capital. “Nobody knows what to do in these kind of markets, nobody is ready to sell or buy and we’re all just sitting here watching.”
“What’s humbling is that you could be the best trader, best investor, or best analyst in the world, and this market will still bring you to your knees,” Mazzella said.
Robert Competiello, another trader, commented to a passer-by that some days have been like “juggling knives while balancing on an egg.”
“We need a rally, I’m telling you, buddy,” Mazzella told another trader on the telephone as the Dow dropped 500 points.
That rally never came. The market swung back and forth in the final hour of trading before giving in to a stream of selling in the last minutes. At Knight, the day began to wind down as it began, with traders screaming out orders before the final bell – which left the Dow down 733, its second-largest point drop.
“We just cut to the low like a knife through butter,” Competiello said as the closing bell sounded.
