A few items to ponder this morning.Jim Cramer and Larry Kudlow (I believe Larry said this on his show on Friday) said that the Fed should lower rates in the face of what is currently going on in the subprime/liquidity/hedge fund crisis.
I don't know if they should or not but if it is the right thing to do and they do it don't they face the question of Cramer told them to cut and they did? BTW, Adam brought up the same point on his blog and I am sure other folks have too.
Reality is not the point here but I think it would create a perception problem, maybe a bad one. I really don't claim to have the answer but it is a question that bugs me.
Barron's had a mention of the Jeremy Grantham comments that I mentioned having read on MartketBeat. One comment from Grantham in Barron's was that "in five years, he expected that at least one major bank will go belly up." Well I am not sure what you think of that but if the subprime/liquidity mess is as bad as some people say then a major bank or brokerage will fail. This is what happens in bubbles or big manias or whatever this is.
Keep in mind this is not a prediction or any type of analysis but simply a good memory of how these things usually pan out.
Barron's also had a big article about junk bonds, questioning whether it made sense to wade in yet. One thing about unwinding big events like years of money that was too cheap is that it takes a long time to work correct. Sub prime was a problem in Q1, then it went away (from the headlines anyway) and now it's back. We might be talking about it less by labor day but the problem will not be gone. This relates to the junk bond article in that risk is being repriced. Pools of capital need to make some changes to what they own and this sort of rotation could take months which I think means that although spreads are wider than they were, they will get wider still.
I am not saying there needs to be a horrible end, I wouldn't rule it out, but it will take longer to work this out than what I think I am hearing other people say.
Over the last couple of years I have been writing about this whole thing as an excess of liquidity but I don't recall ever trying to guess what the outcome would be. This is not something that has to be done. Recognizing where an excess might be and tilting away from it is much easier for anyone to do than try to time this sort of market event, quantify it and then trade it. That to me borders on a type of rocket science that I know is beyond me.
I mentioned in this week's video about having been underweight financials for a couple of years and the notion of excess liquidity is why. If you are heavier in financials now OK, learn from this. There will be an excess somewhere else in the future. The simple decision to underweight where the excess exist becomes a much more important decision than the stocks chosen in that segment of excess.
The picture is from Molokai on the east end near mile marker 16.
13 comments:
Congratulations on your interview on the front page of the business section of today's Daily Courier "Rein in Stock Anxieties". It's difficult for a reporter to get your comments down in a few chosen sentences but I think he got the basics of your philosophy to "not panic". If the market opens down tomorrow I think I'll start nibbling since long term, we should go higher than this.
Cramer is basically saying the hedge funds (a known risky business) are in deep trouble and the Fed needs to bail them out. Cramer does not understand the business of the Fed. The Fed is not here to guarantee risky hedge funds will not loose money. The consequences of bailing out risky hedge funds is enormous inflation and a continuation of the problem. If the Fed supplies enough liquidity that you can sell high risk subprime loans in the market place again, then mortgage lenders will just create more subprime loans. This has got to stop and the Fed knows this.
Later this year when the hedge funds are hemorrhaging and banks are having problems the Fed will supply money to help the banks. That is one of the Feds primary goals to stabilize the banking sector when necessary, but not now bot for hedge funds.
I think the large negative effect this will have on stocks is rather obvious. Rocket science can get a lot more difficult than this.
Making LOTS of no money down loans to high risk borrowers or other high risk loans without sufficient risk premium may lead to eventual problems in the financial sector? There is an obvious significant problem here.
I don't have an MBA and I attended Harvard On The Hudson. I've done pretty well on the markets just using some common sense, and in this case my spidey senses are telling me the good times are coming to a halt for a while.
I think it was a crime for the Federal Gov't to make money as cheap as it did. It just goes to show that the people at the top have no clue how decisions that benefit the elite 5% will effect the rest of the country.
This melt down will have minimal effect to the top 5% but will kill the poor suckers that made the top 5% rich.
We all make individual choices in life, and taking on too much credit is one of them. I just think the Feds have a responsilbity to the people of this nation on risk management when they allow no money down loans. At least have some sort of disclaimer on those darn Ditech commericals "..it actually may not be the best time to refinance for all".
So now the talk is to lower interest rates!?!? What the hell? I once heard a comment that one primary difference between conservative and liberals was that liberals wanted to throw money at problems in hopes that they would get fixed and go away. Well, I'm starting to think that our great conservative leaders need to pull their heads from underneath and start thinking about problem resolution which does not involve cheap money.
I say we raise interest rates, and remind people what reality is.
Andy, I would suggest a compromise. I agree that cheap money got us into this mess. Like ethanol, providing cheap money to get us out of it will have unintended consequences just like our ethanol experiment. I think that if the Fed provided special consideration for loans already made to homeowners that would go along way to stabilizing the current situation.
What folks forget is that people who ordinarily could qualify for a loan had to result to designer loans to afford a home due to the massive speculation incited by cheap money that drove up home prices. One merely needs to look at the average home price/income in 2000 compared to the same in 2005. It would astound you at home much more you would have to make to keep the ratio the same (and that includes a generous 5% annually which most folks did not get added to income). I have my study if anyone is interested.
No special incentives for fraud or abuse of standards (loans made to folks who had no way of qualifying). I'm being simplistic, but one can carve out the parameters so that there is some parity.
Bailing out hedge funds. Hey, they're the smartest guys/gals in the room aren't they, and we are the dumb money. I don't want my dumb money tax dollars feathering the smart money's bed.
They won't cut but will add some sentence about watching developments in the credit markets closely... That's my guess.
Another brainiac move....ethanol.
Uses more energy to produce then its worth.
Hmmmm..I can't understand why my grocery bill is sky rocketing....could it be that we are using sugar and corn for something other than eating.
first, there's the idea of making a loan, with no qualifying, to purchase or re'finance an obiously overpriced, bubble, real estate investment. Second, there's the idea of leveraging that loan, as collateral, to make more loans, or buy more CDO's. If that's the best and brightest, well, I'm available for one of those hundred million dollar salaries. I learned during the recent upswings in the market that even buying more stock, cash, as the market rises, gives me a higher average price, such that minor downswings evaporates my profit. Throw in some margin and I'm bankrupt. A bailout of the CDO's would keep the unqualified in the overpriced. Wanna' take real estate up another 50%? Let's take salaries and the price of gas up there too. Is there a word for the euro penny? Cause that's what you'd get for a $US.
Timing Model= 2.5
100% long
Global Allocation of long positions
MSCI EAFE Index 40%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 30%
Top U.S. Sectors
U.S. Technology 5.0
U.S. Industrials 4.5
U.S. Telecommunications 3.5
U.S. Oil Equipment, Services & Distribution 3.5
U.S. Oil & Gas 3.0
U.S. Semiconductor 3.0
Composite Internet 3.0
U.S. Health Care 3.0
U.S. Biotechnology 3.0
Top Intl. ETFs
S&P Latin America 40 Index Fund 3
MSCI Brazil Index Fund 3
FTSE/Xinhua China 25 Index Fund 3
MSCI South Korea Index Fund 3
MSCI Taiwan Index Fund 3
MSCI Emerging Markets Index Fund 2
MSCI Germany Index Fund 2
MSCI Canada Index Fund 2
MSCI Pacific ex-Japan Index Fund 2
MSCI Australia Index Fund 2
MSCI Spain Index Fund 2
MSCI Sweden Index Fund 2
My best guess is we are near an intermediate bottom but I wouldn't be surprised if the market bounces around a lot over the coming weeks and sets some new lows.
The sentiment indicators are signaling a good deal of fear and the smart money/dumb money spread is significant.
Cramer thinks he can jawbone the Fed? That doesn't seem likely.
Anyone quoting Cramer as some sort of expert is a fool.
The clown, known as Cramer, is an entertainer, that's it. Those who actually listen to him for financial advice are in deep trouble.
I've never met Cramer but I'm usually a pretty good judge of character. He seems to come across as a fine guy to have a beer with, but I would not want to work with him. He is a sales guy at heart, and will sell you whatever he believes to be true.
This is a very important statement; Many sales people look at things with one eye closed, which allows them to sell ideas and products based on their own perception of what should be, rather than fact.
I bet Cramer is very close to being this person.
Ethanol huh...is more proof that "Quinn's First Law of Liberalism" -- that liberal programs always generate the exact opposite of their stated objectives still holds true.
I also loved Leisa'a quote concerning hedge funds: "I don't want my dumb money tax dollars feathering the smart money's bed."
Kramer is a clown, but he also seems to be a man who is willing to say out loud what others only think privately--in this case "Only Uncle Ben can save us now." I don't expect Uncle Ben to waste a minute of his time on Cramer's opinions, but I wonder how many others he is hearing the same thing from. What is Paulsen saying? Or the man who hired Paulsen and Bernanke both? If you are sitting in the white House watching your ratings plummet, a cascading hedge fund meltdown can't be good news.
Bernanke has gotten pretty good ratings on his job performance up to now, but I think this week will be the real test of his judgement and resolve.
Linda
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