Financial mayhem

[Wolf DeVoon]

I don't know which is funnier:

Galt's Rescue Plan

http://seekingalpha.com/article/67987-tues...t-s-rescue-plan

or

Rebate checks ahoy!

http://bp0.blogger.com/_b6CLevEGCD0/R9BYOE...00-h/rebate.JPG

Edited March 11, 2008 by Wolf DeVoon

[Brant Gaede]

We are on the verge of a generalized financial panic which would cause further serious damage to equity prices. Gold and commodities in general are no safe haven. You can still buy gold on serious pullbacks and even more if it then continues to go down, but here at $1000/ounce is only a buy point if it's being purchased little by little on a regular schedule regardless of price.

I will soon be 100% cash except for a few shares of one company I do not trade. I'm 80% cash today. If there is a terrible day of panic in the stock market I will put a lot of the cash to work the next day, which psychologically is extremely hard to do. If the panic isn't panic enough to carry into the following day it's not enough panic to act on. In this market I'd want to see at least 1000-1500 points down on the Dow into the second day of trading. After the expected snapback I will probably shortly be all in cash again.

If there is no panic or serious deterioration Monday, I'll be selling short. The Fed has unequicocably demonstrated it no longer has any intervention power to boost markets, unlike late last summer. This means there is absolutely NOTHING in heaven and earth to move equities generally substantially higher. All rallies are being substantially sold into by firms and people in need of cash to get out of highly leveraged positions.

In terms of the economy itself, I don't see much getting better until 2010 and that would be lucky luck.

--Brant

[Aggrad02]

Move to Texas. We have a good economy down here.

[Wolf DeVoon]

Move to Texas. We have a good economy down here.

First of all, Brant's right. I'm 80% in cash, too. The rest is bear plays: TWM, DBA, BEARX, GLD. I sold six ounces of gold coin at $925 and half of my GLD at $980. Not going to buy any more. No doubt that gold will see $1500 or higher this year, but no guarantee of nuthin' any more. Which brings me to the subject of Texas.

I know something about the state. Nice racket in electric power. Plenty of infrastructure and trade, lots of skilled people. You're about an inch from civil war between the Haves, Have Nots, and Wanna Haves, all of them armed to the teeth. People underestimate what serious economic trouble will do to our cities, especially Fantasy Island (Houston). Oil is headed down, not up, for several reasons. State taxes will skyrocket.

W.

Edited March 16, 2008 by Wolf DeVoon

[Backlighting]

I like MLP's (Master Limited Partnerships), usually oil and gas pipelines. They pay hefty distributions (dividends) and have favorable tax advantages. It really doesn't matter what the current cost of oil and gas are-it still has to be moved and I see no let-up in demand.

Check out PAA, XTEX, APL, MMLP. They are all listed on the N.Y. Exchange.

http://www.streetauthority.com/terms/m/mlp.asp

[Mark]

(withdrawn)

Edited March 16, 2008 by Mark

[Aggrad02]

Move to Texas. We have a good economy down here.

First of all, Brant's right. I'm 80% in cash, too. The rest is bear plays: TWM, DBA, BEARX, GLD. I sold six ounces of gold coin at $925 and half of my GLD at $980. Not going to buy any more. No doubt that gold will see $1500 or higher this year, but no guarantee of nuthin' any more. Which brings me to the subject of Texas.

I know something about the state. Nice racket in electric power. Plenty of infrastructure and trade, lots of skilled people. You're a bout an inch from civil war between the Haves, Have Nots, and Wanna Haves, all of them armed to the teeth. People underestimate what serious economic trouble will do to our cities, especially Fantasy Island (Houston). Oil is headed down, not up, for several reasons. State taxes will skyrocket.

W.

I don't agree with you here Wolf. We have a lot of haves, but in general they are pretty quite. You can barely tell the millionaires from the guy next door, and usually if someone looks like they are wealthy, they are not. We also don't have the housing problem here like in other parts of the country, there was no skyrocket in prices and houses are still equal or gaining value. You also do not have that much of a problem with foreclosures. And yes a large part of our economy comes from natural resources, but that should continue in the near future, but the other two sectors of our economy are agriculture and trade (like you mention). While Texas has the second largest economy in the US behind California, we have the largest amount of exportation (trade) of any state. One reason is the tax friendly business environment. Also our major agriculture (corn, cotton and beef) products will continue to be in demand keeping the economy here moving forward. You also have to remember since we grow a lot of food here, food is pretty cheap compared to the rest of the nation, ditto with energy, and with housing low, you can live here 10 times better on lower income than you can anywhere in the rest of the nation, especially the east or cali.

On top of that our economy continues to absorb worker. After Katrina, almost 500,000 evacuees came to Texas and any who need employment were absorbed by the economy, also every year we absorb large numbers of illegal immigrants (one reason I believe that our economy is so strong).

While I also believe that the economy in the US is going to go down the toilet in the near future, I think that it will be less hit in Texas. To have a major revolt between the haves and have-nots you have to have high prices which only allow the haves to obtain necessities, but here in Texas we have the lowest prices in the nation for necessities. Also the tax situation that you mention will not come to fruition. In Texas we have a Constitutional amendment against a state income tax, and other tax increases go over like a lead balloon. Also we do not have many large entitlement programs that would have to be cut, which would enrage the have-nots in most other places in an economic downturn, coupled with lower state revenues. Economically, Texans are pretty libertarian regardless of party.

BTW: I have 9 retail business stretched across Texas, and they preforming strong, 5 to 10 percent over last year.

--Dustan

Edited March 16, 2008 by Aggrad02

[Wolf DeVoon]

I don't agree with you here Wolf. ...In Texas we have a Constitutional amendment against a state income tax, and other tax increases go over like a lead balloon. Also we do not have many large entitlement programs that would have to be cut, which would enrage the have-nots in most other places in an economic downturn, coupled with lower state revenues. Economically, Texans are pretty libertarian regardless of party.

In MARS SHALL THUNDER, speaking for me, Harry says: "I like being wrong." Most of my close friends are Aggies and I certainly wish the people of Texas well. It's certainly true in the oil business, if you want to get it done, send a Texan.

W.

[Wolf DeVoon]

from Capital Chronicle

Okay, folks, this is it. Bear Stearns wiped out, $30 billion handed to JPMorgan to wind up Bear's outstanding junk. Lehman is probably next, then Merrill? Citigroup? Oil at $120 and moving up, no limit on where gold might skyrocket. My plan for the morning is a paired trade: SKF to short financials, a few shares of JPM in case they're the only bank left standing by 4 o'clock. Mr. Market expects the Fed to cut to zero or something.

I give up.

[Brant Gaede]

Ah, c'mon Wolf. The sun'll come up tomorrow. The birds will sing. You want to panic out of cash? Cash is down 2-3% against the yen right now. Too late. Don't make it worse. Have a drink and enjoy the hysteria; don't be a part of the show.

--Brant

[Aggrad02]

Found on other forum:

[Aggrad02]

Also found on another forum:

http://www.bloomberg.com/apps/news?pid=206...&refer=home

Reduced Fortunes

Cayne, who remains non-executive chairman, stepped down after reporting an $854 million fourth-quarter loss, the first in the company's history. He was at a bridge tournament in Detroit last week as speculation about the firm's cash position pummeled the stock.

Cayne ranked as Wall Street's richest CEO, with $1.3 billion of assets, according to Forbes magazine's 2007 billionaire survey. His stake in the firm approached $1 billion last year when the shares reached their peak price of $170. Under the terms of the JPMorgan acquisition, his holdings are now worth about $12 million.

Joseph Lewis, Bear Stearns's second-largest shareholder, has spent more than $1 billion on the firm's stock since September, paying as much as $150 a share. Lewis, a 71-year-old billionaire, wasn't planning to reduce his stake, a person close to him said March 11. He's now entitled to $22 million of JPMorgan shares.

[merjet]

“This is like deja vu all over again.” - Yogi Berra.

J. P. Morgan stepped in to avert a crisis in 1907. See the 4th paragraph here.

I can't wait for 2109. I'll be shorting like crazy.

Aggrad02's graph would appear more dramatic if it used a linear scale rather than a log scale.

Edited March 17, 2008 by Merlin Jetton

[Wolf DeVoon]

Credit default swaps charted above. I agree with you as always, Brant. Saw a truly stunning sunset tonight, absolutely beautiful. Went to hear a lecture by a Nobel laureate. (Laureate is the stuff they put in shampoo, right?) Bought SKF. Very sad business. My daughter is doing well in primary school. We have a cash cushion. 10,000 miles from danger.

I'll stay up late to watch the market open. Talk later. I like being wrong; hope to hell I'm wrong today.

W.

[Michael Stuart Kelly]

Greenspan warns of worst crisis since 1945

17 March 2008

By AFP

FRANCE 24

From the article:

"The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the Second World War," Greenspan said in a Financial Times commentary.

"It will end eventually when home prices stabilise and with them the value of equity in homes supporting troubled mortgage securities," he said, referring to the meltdown in the US subprime home loan market and subsequent massive losses for the banks holding the debt instruments.

"The crisis will leave many casualties," he said, his remarks coming after Bear Stearns, the fifth largest US investment house collapsed Friday and was taken over by JPMorgan Chase for a fraction of its value of only a week ago.

I can't get through right now to the Financial Times, so I went with France 24. This needs no comment on my part. (Well... maybe a little, a little later on...)

Michael

[Brant Gaede]

Any panic was in foreign markets. Not so bad here. The big grind down continues. If Greenspan is predicting doom, maybe the worst is over.

--Brant

[merjet]

Interesting article by Greenspan.

"The essential problem is that our models – both risk models and econometric models – as complex as they have become, are still too simple to capture the full array of governing variables that drive global economic reality." - Greenspan

I believe that by "econometric models" he means national or global level models that must take into account more or different variables than "risk models", e.g. employment rates, currency exchange rates, government fiscal policy, and inventories. By "risk models" I believe he means firm level models like value-at-risk. Such models include variables like interest rates, stock returns, default rates on debt, and currency exchange rates (if enough relevant for the firm), but not all that would be included in an econometric model.

As the number of variables in a model increase, the complexity increases not linearly but exponentially. I'm not familiar enough with up-to-date econometric models to know if they use some sort of Monte Carlo simulations. But I do know that Monte Carlo simulations are often used in risk models. They involve projecting usually thousand of scenarios wherein the variables change, the end product being a probability distribution of outcomes, each with a probability of one divided by the number of scenarios. It's easy to discount very unfavorable outcomes due to their low probability. But they do happen occasionally in the real world, especially when the correlation of variables included in a model gets out-of-whack. Also, value at risk models usually have a short time horizon.

Greenspans talks about euphoric periods. The Fed has some power to dampen them, mainly by raising the interest rates under its control. But the Fed can't dampen by running a government fiscal surplus, and we know politicians shun them. And there is a conflict of interest for the Fed -- higher interest rates mean higher borrowing costs for the government.

Ideas about surpluses and deficits are to a great deal influenced by the legacy of John Maynard Keynes. When Keynes had political influence, however, during the Great Depression and WWII, his prescriptions for euphoria didn't see the light of day.

There is an interesting aside in the Wikipedia article about Keynes. He argued that the WWII effort should be largely financed by higher taxation, rather than deficit spending. Compare that to recent years. Not surprisingly politicians don't ask for prescriptions when they are feeling good.

[sjw]

Greenspan recognised that changes would have to be made as a result of the crisis but he argued that they should not compromise the abiding principles of free competition.

Except of course currency competition.

[merjet]

"The Federal Reserve and the U.S. government swiftly approved the all-stock buyout to complete the deal before world markets opened. The Fed also essentially made the takeover risk-free by saying it would guarantee up to $30 billion of the troubled mortgage and other assets that got the nation's fifth-largest investment bank into trouble." (source)

There is something I'd really like to know. If this turns out to be a great deal for JP Morgan, is the Fed and the U.S. government going to get a big chunk of the money (beyond the taxes collected on the gains)?

Edited March 18, 2008 by Merlin Jetton

[Wolf DeVoon]

[Wolf DeVoon]

Martin Hutchinson at Prudent Bear today:

"The Fed is doing everything it can to stave off disaster, but frankly, it is not rich enough. With assets of about $800 billion, having instituted $400 billion of rescue programs in the last week plus unspecified intervention with Bear Stearns, it is pretty nearly tapped out. It does of course have available a further source of liquidity, the Federal printing press. With inflation already moving at a brisk trot, use of that source will replace an incipient recession with a deeper and highly inflationary recession."

[syrakusos]

There is an interesting aside in the Wikipedia article about Keynes. He argued that the WWII effort should be largely financed by higher taxation, rather than deficit spending.

For 20 years, Romania had no national debt, no foreign debt. They paid for everything with taxation. When communism fell, it took about two days and the Ceausecus were hauled out and shot. Most politicians prefer some other outcome.

[Aggrad02]

For 20 years, Romania had no national debt, no foreign debt. They paid for everything with taxation. When communism fell, it took about two days and the Ceausecus were hauled out and shot. Most politicians prefer some other outcome.

Michael,

Your explanation does not seem accurate. This is from wikipedia, is it right or is the account that you are giving right?

Despite his increasingly totalitarian rule, Ceauşescu's political independence from the Soviet Union and his protests against the invasion of Czechoslovakia in 1968 drew the interest of western powers, who briefly believed he was an anti-Soviet maverick, and hoped to create a schism in the Warsaw Pact by funding him. Ceauşescu did not realise that the funding was not always very favourable. Ceauşescu was able to borrow heavily (more than $13 billion) from the West to finance economic development programs, but these loans ultimately devastated the country's financial situation. In an attempt to correct this situation, Ceauşescu decided to eradicate Romania's foreign debts. He organised a referendum and managed to change the constitution, adding a clause that barred Romania from taking foreign debts in the future. The referendum yielded a nearly unanimous "yes" vote.

In the 1980s, Ceauşescu ordered the export of much of the country's agricultural and industrial production in order to repay its debts. The resulting domestic shortages made the everyday life of Romanian citizens a fight for survival as food rationing was introduced and heating, gas and electricity black-outs became the rule. There was a steady decrease in the living standard (and especially the availability and quality of food and general goods in stores) between 1980 and 1989. The official explanation was that the country was paying its debts, and people accepted the suffering, believing it to be for a short time only and for the ultimate good.

The debt was fully paid in summer 1989, shortly before Ceauşescu was overthrown, but heavy exports continued until the revolution, which took place in December.

http://en.wikipedia.org/wiki/Nicolae_Ceau%C5%9Fescu

[Wolf DeVoon]

[Brant Gaede]

We had the tech bubble, then the real estate bubble. Now comes the inflation bubble--already here, BTW.

--Brant