Cognitive Economics (how things work)Uncategorized

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