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Latest Comments22 Comments
Don't Panic
Where's the Bottom? Still Anybody's Guess
As long as the Fed starts buying a carefully calibrated set of tranches (e.g. 30/60/90 days past due payments, home in foreclosure for 3/6/12 months, etc. or something similar - you figure it out), designed to price recognizable types of paper assets, reference prices will be set. A few billion worth of such tranches should be all it takes for sideline cash to start moving in once it knows the price.
Regardless of whether the Fed buys high or low it won't matter. Whether it sets a floor or a ceiling, the market can adapt and establish a market price above or below the Fed's price. As soon as there is a Fed price, an avalanche of cascading mark to market adjustments across asset holders worldwide will immediately take place. In an instantaneous Bang! portfolios will be adjusted, assets can be bought and sold, and liquidity restored.
No one wants to be too early, thus they sit and wait. Only fools rush in, and therein lies the appropriate role for the Fed - to play the wise fool whose actions unlock liquidity by establishing prices. With the entire $700 billion at its disposal, even without spending another dime beyond some initial billion dollar tranches, the Fed will represent a threat to buy at its price that other parties will not be able to ignore.
In addtion, the banks who hold the bad paper now should be incentivized to continue holding a portion of it. In fact, the more they hold, the more the Fed should agree to buy. Similarly, the more capital they raise, the more bad paper the Fed should agree to buy. In other words, they need to earn the right to sell the bad paper to the Fed. They would have held some bad debt anyway, why shouldn't they continue to do so? They would continue to seek additional capital, why shouldn't they continue to do so and why shouldn't the Fed's solution be dependent on such actions? That would serve as a damper on the effects of the Fed's actions and serve to reduce the overall Fed contribution.
Paulson/Bernanke: $700 Billion at 'Hold to Maturity' Pricing
But any buying of bad paper should include an incentive for the banks to hold some too. The more bad paper you keep on your books, the more bad paper the Fed will buy from you. There is no reason why the banks cannot hold onto to some of the bad paper. They would have some under any other market conditions, so they should have some now. Under no circumstances should any bank be allowed to sell 100% of its bad paper to the Fed.
There also should be conditions that encourage the banks to find additional capital, especially private equity, to strengthen their balance sheets. The more capital you bring in, the more bad paper the Fed will take off your hands.
As far as other conditions like equity and caps on pay, these and any other onerous conditions that anyone can come up with are absolutely necessary It is the only way to get their attention and make sure they will not ever screw up again.
The medicine has to taste so bad that they understand the cure is worse than the disease and suddenly that bad paper doesn't look so bad after all and it hurts just thinking about over leveraging.
Dogs of the Dow in the Dumpster
AIG: The Cramer Conspiracy Theory
Remember, and he always says, it's a CHARITABLE TRUST. He just threw $3 million in a pot. He probably already took a deduction on it when he set it up so it's just a giveaway for him.
The newsletter is somewhat useful for newbies with an online trading account to begin understanding some of the basic trading psychology and strategies - but very basic.
Cramer on his show is at his best when he is calling Wall St. on the carpet. He knows the tricks and probably invented some of them and deserves credit for giving a tongue lashing to the idiots who abuse the market and fail to regulate it and themselves. He says what a lot of investors are thinking and wish they could say to the SEC, the Fed and the hedge funds.
Hey if you think you can do better, go for it! There is plenty of room for more Cramers on tv.
New Attack Plan: Bring Back RTC on a Grand Scale
You are a pussy if you think that the market has to suck at the government tit when times get tough. Get over your oral fixation, stop being a cry baby, and buck up and be a man.
Where is the vaunted private capital? Let it step in, take out the bad paper, and take the high risk it celebrates and champions. You don't need to give it to a government wet-nurse first. Just sell it to the highest bidder. Let a third party assess the value first if you want if you think the water is so full of sharks that you won't get a fair price.
Where is the free market? Let it work as claimed to sell anything and everything to anyone and everyone, and let the market dictate what the market will bear. I don't remember the government bailout being a part of the free market.
Where are the regulators to set a level playing field for all participants so that there can be a free market? Why are there different rules for different participants? Where are the protective measures that address the well known vulnerabilities of unbridled market particpant self-interest and greed?
You can't have unregulated or weakly regulated markets dominated by theives, cheats, frauds and con men and then expect the government to save the day when the con men run out of victims and start conning each other. No what the government must do is arrest the con men and put them in jail or line them in front of a firing squad.
You can't have ratings firms that put a defective feedback loop into algorithms that look around see what kind of effect their own ratings are having on the market and then factor that back into the ratings with no governor to prevent a death spiral.
The dotcom crash killed off the CEO.
Aug. 2007 was the death of the quants.
Aug. 2008 was the death of the shorts though their sentence has not yet been imposed.
Sept. 2008 is the death of investment banking and it will also prove to be the death of the CFO who utilized all the exotic instruments that brought down Wall St.
The CFO is now as weak and pathetic in boardroom politics as the CTO. Some idiots are trying to put the risk managers into the batting box next, but don't worry we're up to their tricks and will have none of it.
Live by the market. Die by the market. Live by the trade. Die by the trade.
Are We There Yet? Not Even Close.
Why Lehman Wasn't Saved
The most troubling point you make, namely, "Banks are massively interconnected, with thousands of counterparties around the world, and if a major counterparty were to go bust, there's a risk of massive global contagion as failed trades cascade through the system and cause a legion of bank failures elsewhere," is dead on and strikes at the heart of a vital issue.
That there are in effect so many potential single points of failure throughout the system is a critical flaw in any open market theory. If an open market is to thrive, the very existence of the market itself must not be something that is threatened by the failure of any one participant or even a few participants no matter how large. This is something that needs to be looked at more closely by the industry and regulators alike.
Systemic adjustments would seem to be called for to reduce the risk of massive failures. Whether that means better risk management, better asset pricing, better asset management, better reporting, better transaction flows, no matter what it takes to achieve, it must be done. We simply cannot have and will not stand for irresonsible risk management and concomitant daily volatility that is so great that it puts the very existence of the entire market at risk every day.
Spreading the risk around is a prudent strategy but clearly it didn't work this time. Where are the lessons here? Lloyd's perhaps? Ok let's just sell everything to Warrren Buffet right now before he dies. Who knows who will be running things after he goes? No? Ok, get ready for some changes then.
As to Lehman, and what may end up being a state of technical default based on FASB mark to market rules, those rules may need to be revised but there is one principle which must stand and that is, No more Enrons no matter what. If mark to market is what it takes to avoid another Enron, then unfortunately, so be it.
If there is one universal theme that plays itself out over and over, it would seem to be that there is a rule of thumb which says Wall St. will screw you no matter who you are, up to and including screwing Wall St. itself, and quite possibly even up to and including the very existence of Wall St. itself.
And while no one feels particularly sorry this time for what is happening to the financial sector because we know they have only brought it upon themselves, still there is something not right with an industry which lives by that rule of thumb and seems helpless to do anything about it.
There has to be a better answer than playing chicken with the federal government, and peek a boo and tag you're it with private equity.
The Oil Bubble Will Meet the Same Fate as Tech, Housing
But even if this market eventually corrects itself, one has to wonder, why is the cost of oil is so disconnected from the cost of production, refining and distribution, and why is it disconnected from actual supply and demand?
We can see clearly now the supply chain is corrupted when futures market pricing drives retail prices in real time (but of course in the up direction only - prices at the pump somehow never fall as fast as they rose).
Speculators should be free to make whatever speculative bets they like in free markets. However, there is no reason those bets should affect the underlying subject of the bet.
When you bet on the outcome of a sports game in Las Vegas, your bet has no affect on the score of the game (unless there is corruption which of course would be, uh, how should we say, Illegal).
Can you imagine what would happen on the field if the players had a stake in the betting action on the game and the odds were posted on the stadium scoreboard in real time during the game? This is what we have in the oil markets today.
In the same way, speculators should be able to bet in a disconnected way on the future price of just about anything. But their bets should not drive the market or corrupt the supply chain. And this is what we must achieve in the oil markets or we will certainly have more bubbles in the future.
The price of a commodity is a kind of score. And the scorekeeping must not be in the hands of the gamblers in the oil markets any more than it is in the sports betting markets.
Not to mention, this is the age of the Internet, the great disintermediator. Name one industry that has not been disintermediated by the net. Oh, yeah, Oil.
Why can't I buy my own barrels of oil direct from OPEC? Why must I buy through a corrupt, unregulated and disorderly commodity exchange market?
Where is the Amazon and Orbitz of the oil market that puts the customer in control? It sure isn't the commodities market.
As to drilling in Anwar, et al in the U.S., before we go down that path and begin consuming our reserves, we must ask ourselves some very fundamental questions.
So let me ask you this, if you could choose between these outcomes, which would you pick? We run out of oil before the Saudis. The Saudis run out of oil before we do. We both run out at the same time.
Now what do you suppose the odds are that we and the Saudis will both run out of oil at exactly the same time. You got it - that will never happen. So we are left with the other two.
I don't know about you, but if I had the choice, I would rather see the U.S. be the last oil field standing (our children's children and all that), so I'm not that eager to see us start the drilling quite yet. Oh and since we know that the price of oil has nothing to do with supply and demand, all the drilling in the U.S. will do nothing to bring down prices. Sad, but true.
So we are left to other means of ensuring that prices are not corrupted by the markets. Anyone have a plan for that?
Myth and Meaning in the Great Oil Game
Those who can't, teach.
Those who can't teach philosophize.
Those who can't philosophize criticize.
Those who can't criticize poeticize.
Myth and Meaning in the Great Oil Game
Go ahead and bet on it all you want, just as you can bet on what the weather is going to be tomorrow or what the football score is going to be. And just like those examples, the bets you place should have no more affect on the outcome of the price of physical oil than they have on the football score or the amount of rain. If you are saying that is indeed how the markets are working, then all is good. But that is not what is being reported. When the futures cost goes up 90 days in advance, the retail price is going up immediately. That is wrong.
As to the producers, I have news for you. OPEC has been around for a long time. Now if it turns out that they are indeed screwing us on oil prices, then the reality is that we declared war on the wrong country. Instead of conquering our enemy, we should have conquered our friends and taken their oil. Never mind what happens if we have to drop a bomb to do it and the oil ends up radioactive...
Myth and Meaning in the Great Oil Game
Multinational Corporations Step Up the Search for the Next China
Oil Is Up Due to Fundamentals, Not Speculation
Ask yourself why it is even necessary to have a futures market on a commodity with a known depletion rate and a known rate of production and consumption. That would be like betting on the number of hours of sunlight each day. It is a suckers bet and the suckers will have their revenge. Like I said, you are getting advance warning. Take heed.
[ED - COMMENT EDITED TO REMOVE ABUSE.]
Marriott International: Where Is Your Balance Sheet?