Archive for the ‘crisis’ Category
The Wild Market Moves Continue
Posted by Jody Eisenman | Filed under crisis
As has been happening for the past 2 months, the market continues to trade wildly, thus continuing to reinforce my opinion that long term trading doesn’t make any financial sense anymore. Therefore, if you are going to invest funds in anything today, one must either keep a close watch on your portfolio, or rely on someone you trust to do it for you. There has never been any time in US financial history where the market has had moves of several percentage points per day. Thus, attempting to simply “buy and hold” seems to me to be a rather risky strategy.
Yesterday, the market was up over 10%. What this means to today’s action is probably zero. So far every major rally has had no follow through at all the next day. We could be up or down several hundred points. In fact, even looking at the market at midday is not really a good indication. Most of the market’s volatility seems to come in the last hour of trading.
It looks like Obama is going to win the Presidential election next week. While no one can be quite sure what his economic policies will be, I don’t think either he or McCain really has a firm grasp on the world financial situation. Why do I say this? Because each candidate speaks of all these wonderful programs they are going to implement if elected. We are now facing, by far, the biggest deficit in history. How exactly are they going to pay for these programs? Raise taxes in an economy where people are already suffering? Many Americans are suffering through job losses, housing prices (home foreclosures are now at record levels) and the severe declines in their personal and pension accounts. I believe that we are probably going into a very difficult economic climate going forward. I will speak more about this later today.
The Death of the Long Term Trade
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.
Credit Markets, Warren Buffet and the Lehman Settlement
Posted by Jody Eisenman | Filed under crisis
As I write this on Friday afternoon, the Dow Jones is up about 200 points. The TED spread, which is a good measure of lending willingness has dropped a full point off its’ high last week from 457 to 357 basis points. Warren Buffet, head of Berkshire Hathaway and one of America’s most successful investors believes that now is a great time to buy stocks. Have we bottomed here?
Maybe, but I wouldn’t bet my last dollar on it. LIBOR remains very high at 4.41 for 6 months. As a measure of comparison, 6 month t-bills yield around .43. So, there is almost a 400 basis point difference between the two, which is still incredibly high. In addition, consumer spending is dropping, unemployment is increasing, and the credit markets will probably take some time to adjust. In other words, even if credit becomes more available, it’s not like every company and municipality that needs cash desperately is going to get it immediately. Thus, I still believe that many of the weaker companies (especially financial ones) may still face eventual bankruptcy. Hardly a day doesn’t go by where another large hedge fund announces that they are facing huge redemptions and/or liquidation. There is clearly still a lot of skittishness in the financial world. Any new event could well trigger another huge selloff. In regards to this, readers should be aware of the Lehman settlement.
The Credit Default Market is estimated to be in excess of $50 trillion. The Lehman Credit Default Swap (CDS) settlement will take place this Tuesday, Oct 21 in the amount of approximately $360 billion. This sounds like a staggering number, and it is, but it is also widely believed that many of these CDS were hedged. In other words, the institution that was on the hook for say $10 billion may have purchased $8 billion in order to hedge their bets. Thus, some amount of this settlement will probably be having money simply going back and forth to the same firm. However, it is also widely believed that AIG was a major seller and thus on the hook for a huge amount. This, incidentally, is why the Fed chose to bail them out. Many hedge funds were probably net sellers. Thus, they are on the hook for large sums. One of the reasons why the market has been so volatile this past week is due to hedge fund liquidations in order to meet these calls due on Tuesday. Should any of the banks have huge exposure, this could lead to a major potential market selloff. On the other hand, if the settlement goes smoothly (i.e. everyone gets paid as expected) then the market might very well rally strongly. I will try to update this situation as we get closer.
Many people have asked me where to put their investment money now. If you wish personal advice, please call me at the number on the right side of this page. In the meantime, stay safe!
