there is no Market Bottom any more

In 1987 I was working for a blue chip company selling computer systems and a friend of mine worked at Dean Witter.  I remember the crash very well because it was exciting to listen to the news and I was not affected by it.  My company had a pension plan, a good health plan, and great perks as well.  So it really seemed isolated from the investors of the time.  Back then not many people had IRA accounts or a 401k.  It was rare that anyone had any money to invest beyond their home and car, or savings for a trip, and maybe a bank savings account for college.

The important thing I remember, is that the news each day ran an update on the ratio of margin to equity in the exchanges.  Okay, this is new to most people who will read this but it is very important because it underlines the real difference between what is happening now and what happened in 1987, 1997, 1998, 2001, and even 1974.  This indicator really told the story of how far over-bought the market was, and how far it could drop to reach the bottom.

How it works is simple.  You just get the dollar value for how much is on margin (borrowed money) and divide that over the current market price, or subtract it directly to find the amount the market would be priced at if nobody borrowed against their shares to buy more.

I remember my friend at the brokerage was literally crying his eyes out when the market crashed.  It made me mad that money could mean so much to someone.  Knowing how great my company was and how well I would do regardless of the market dropping in value just made me think that if this guy were not watching the markets so closely he would see how fast business was increasing.  The momentum would carry us right back up again.

So I called him back on the phone the next day and told him what I thought the market bottom would be.  He was angry with me; how could I know, I wasn’t a broker!  No, I wasn’t but I knew the difference between loaned value and dollar value.  So I yelled right back at him and let him know that it was the best buying opportunity he would ever see for the rest of his career!  He slammed the phone down on me and I gave up on him.

But the story continued.  The next day he called me on the phone and was yelling at me again!  Only this time he said he was doing great, was happy with the market and had pulled in a lot of new money since I last talked to him.  I asked what had changed and what was happening.  He thanked me and said he slammed the phone down because he realized I was right and he needed to start making phone calls to potential clients to get them in the market!  Wow!  I had no idea.  I didn’t understand what he really did over there.

The point is that even I, at the time a total novice, could read the market enough to make a buy decision.  All the numbers were there for anyone to see.  You just had to look them over, consider the meaning, and make a decision.  But today this is nearly impossible!!!

It’s impossible because they no longer print the information you need, or the trading is done in the back room, or on a rarely traveled-to-floor of some skyscraper in New York, London, China…  The markets used to be about stocks and investors making investment decisions.  Now nobody pays attention to what’s going on, it’s the monkey with his hand over his mouth leading the monkey with his hands over his eyes!  Don’t ask, don’t tell what’s in the Allocated and Diversified portfolio.  Now I know that some investors do look deeper than their name and account value on the statement but the vast majority are afraid to open the mail.

Today we have no idea how much Margin is in the marketplace because, funny thing, they don’t tell you that any more!  We can’t tell because so much of it was done between Hedge Funds, Bankers, Brokers, Mortgage Companies, Non-US private accounts, Sovereign Funds of other nations, and on and on.  Nobody knows how much anyone at these places has in real equity!  But we are slowly finding out.  I guess we know for sure that the Fed believes there is at least $300 Billion worth of margin in the U.S. alone, or they would not have put up that amount to sieze control of AIG, shore up money markets, and guarantee other short term loans.  I am guessing that the Fed, in taking over AIG and other funding, probably covered only 20% of “margin”, and “margin” is not really the correct name for it.  It is a blend of margin and failed debt, but still has the overall effect of margin.  So let’s call it that.

Investors are completely in the dark on this, totally, and for the first time probably ever, there is nobody out there to turn to.  Will you call your broker and ask?  Why would you?  They don’t know and the firm they work for is probably part of the problem!  If so, that firm also cannot afford for you to pull your account so they could possibly tell you that everything is great and waiting it out is best.  Some of my friends tested their advisors today with a simple question, “How safe is my Money-market Account?”  And the answer back was the same old line about how money-market funds never lose value.  The advisors had no idea that money-markets were coming unwound this week and so severely that the Fed injected billions and so did many other countries around the world in their own banking system!  Even Russia!

It is very possible that many of today’s Financial Advisers are not any better than a shoe salesperson.  They have no idea what you really want but they will be glad to shoehorn you into something and check you out at the counter.

Copyright 2008 Michael P Arnold, MPArnold

AIG Conservatorship by the Feds

Definition:

  1. A person in charge of maintaining or restoring valuable items, as in a museum or library.
  2. One that conserves or preserves from injury, violation, or infraction; a protector.
  3. Law One that is responsible for the person and property of an incompetent.

Okay, that sounds pretty harsh to me.  I don’t see the benefit of placing AIG in that situation.

How can it be positive for the Government to seize control of the largest insurer in the world?  The best thing to do is allow the company to fall into liquidation, part out the elements which are valuable, let the shareholders take the loss rather than the government (citizens) and then the new owners of those elements can put them back to work again to help get the economy going.  By the way, that is what shareholders are for!  They accepted the risk in the company, but taxpayers did not.  Why reduce the risk of the stockholder and spread it out to the taxpayers?

It would take FOREVER for the government to fulfill the task of protecting and reissuing the assets of the firm.  In a much shorter period of time the assets can be producing again, maybe even return some of the previous share price to stockholders.  This would allow the failed management to exit into the work pool where the belong, and take losses along with the responsibility.

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Update: As it turns out the Fed did take control of AIG and it is going to take a long time… Two years!  That may not sound like a lot but since they are planning to sell off portions of the company and attempt to put it back in shape, this will take much longer than Barclay’s will to utilize the assets of Lehman Brothers.  It would seem that in the end AIG had no choice.  They had to either sellout to hedge funds for let the government take over.

This is a sad state of affairs.  And we thought the war in Iraq was expensive.

Why the Fed Kept Rates the Same

Today the Fed elected to keep interest rates the same and instead decided to use Fed lending to help out the markets.

Why?

First, they may need the cushion to be able to lower rates later in a worsened situation.  Second, they are preparing to see how much more they need available to negotiate bailouts or help mergers along.  Third, cutting rates has no impact if no one is borrowing money.  Fourth, Banks have already de-coupled from the Fed lending targets because of the constraint of having little cash available between them and are causing other banks and institutions to bid up overnight lending.

This is putting pressure on money markets and creating a real threat to average investors and that is why the Fed put $50 billion in the hat, to help maintain money market funds.

Everyone should pay attention to this, since it really underscores the real depth of the problem.

Copyright 2008 Michael P Arnold, MPArnold

You Created the Deficit! Yes, YOU…

If citizens of this country are deep in debt, then why do they expect the Federal Government to be any different?

It’s really a crazy thing. The biggest consumer economy in the world is the United States of America. We consume for lifestyle, reward, fun and entertainment, excitement, and a whole slew of reasons. The fact that we are consumers is also the basis for why the Dollar has value. Our ability to consume allows us to be competitive internationally. If we did not consume as much the dollar would be worth less, just like the Japanese Yen. Instead, we create a very high dollar “velocity”. The faster the dollar travels from one person to another or one entity to another, the faster our economy expands. This brings us to the crux of the current problem.

Just like the economy before the Great Depression, there has been a wild increase in credit and credit-based spending. When credit expands too rapidly then we end up in a situation in which there is not enough cash or velocity of cash to keep up with the debt load. In order to re-set the economy back to a normal credit balance, some loans must be called in.

Example: It’s ironic that some Hollywood movie stars will complain about spending and excess, what they believe to be a high debt load in the deficit numbers, and all along it is the consumer who makes them wealthy in the first place. It is the military fighting for freedom which allows our ability to live our lifestyle in which we can afford such entertainment. But movie stars then seem to be mad at us for it. It’s crazy! lol

Copyright 2008 Michael P Arnold, MPArnold

Political Econocide

How much of the Brokerage Failure has to do with politics? Seems like quite a bit! Just like the easy money of the Roaring Twenties, the easy money of the recent times can easily lead to a new Depression. Much of this had to do with Congress allowing Freddie and Fannie to run wild with low quality loans which the lenders all believed would be guaranteed by the full faith and credit of the US Government. Which they are, but now at a direct cost to the taxpayer. All this bail-out business has everything to do with politicians, bankers, brokers, and other financial institutions trying to save each other’s necks rather than do what they have fiduciary responsibility to do, protect the investors.

Now we are past the beginnings of this and well into the final demise of some of the institutions. Then the price tag rolls into the share holders and the taxpayers. But don’t think it stops here… next we see the loss of small business and many, many jobs. I don’t think they can turn the real estate market around fast enough to save Wall Street. Do you?

Political Econocide. The culprits/perpetrators are: Congress, Wall Street, Big Banks, Hedge Funds, Bond Brokers, and Mortgage Companies to name a few. They killed our economy.  They found easy money in loans to citizens of this country, then leveraged it into more borrowed money for bonds, then more borrowed money for investment in commodities which they all expected to bid up in the exchanges. Now we can see they borrowed to borrow, and then to borrow again. They even ignored good quality business while they wasted their time with “fools gold”.  On top of all of this, it is beginning to look like many congressmen, on both sides of the aisle, received large donations from Freddie and Fannie!  They thought your mortgage, paid for by your hard earned payments, was easy money for them to line their pockets with!

What will happen next? We don’t know for sure but expect a possible 30% reduction in stock prices, expect more bank failures, expect loan money to dry up, expect cash to become constrained, expect lots of job losses, and expect to become very, very thrifty… just like your grandparents who are old enough to have been born near the last Great Depression. Expect to vote for someone who can represent us better in Congress. If the past is a predictor, then about 1 out of 5 people will not have a job in the near future. We may not have wild inflation but if you don’t have cash in your pocket or in your bank account, then what do prices mean?

But this is what happens to us when we bid each other up on homes, and by not being thrifty at home, we cannot expect anyone in Congress to be thrifty either.

BTW… the major earmarks of the last depression were Excessive Credit, Constrained Cash, Real Estate Bubble, Stock Bubble, Natural Disasters, Corporations Hoarding Cash, and 20% Jobless Rate. Pretty much all of this is in place except for the Jobless Rate. Right now, many people are employed by the Government and that alone could be the one thing that keeps us from a total Depression.

(Copyright 2008 Michael P Arnold, MPArnold)

Making Sense of the Dollar

After 9/11 George Bush determined to take care of business.  Without getting into too much detail you should recall that France, Germany and a few other countries were not supportive in Iraq and thus irked enough people in the U.S. to cause them to boycott imports from those countries.  In response to poor support from our good allies who we usually stand up for very well, financially and in defense, George Bush chose not to prevent the dollar from falling in value on the foreign markets.  This in turn allowed American goods to become cheaper and goods and services of those allies to become more expensive in the U.S.

Why would George Bush’s administration do that?  It gave us economic strength and strained the other countries.  It was a way of raising tariffs in a sense without creating new tariffs in fact.  There are other advantages such as the weaker international dollar reduced our adjusted cost of paying off international deficits.  It increased our ability to export goods and created a positive environment for U.S. business abroad and definitely gave us a better competitive stance regarding China.

Now, because the dollar was allowed to fall in the international markets, and because we are exporting more, and our services are more in demand, we are in a much better position than we would have been in during this economic debacle which our bankers, hedge funds, brokers, and commodity traders have leveraged us into.

As you read news headlines, and if your only source of information is the news media, then you are not likely to know or understand these things.  You are missing a huge part of the picture and are bound to be trapped by the same frustrations as the rest of the crowd who believe that George Bush has done terrible things to this country.  If you will do your homework by reading, really reading, and then try to understand the meaning of things and why they are done (follow the money trail) you will understand things much more clearly and will be better off in deciding what to do with your own wealth.  If you can’t find the information or don’t understand it, then talk to your Financial Advisor.  If your advisor does not understand either, then find a new one!