The puke down continued yesterday. The sold them with both hands, well they have been selling them with both hands for ages now haven't they.
I read one quick snippet about JP Morgan and Bank America going to mid 90s levels. I find the selling in the financials to be fascinating but also scary (not to imply emotion but for the sake of word economy). BAC closed at $13.06! What would Krazy Eyez Killah from Curb say about that one? I sold BAC recently in the $28s, about ten minutes later they banned short selling and the stock went to about $37. So since then it has fallen by almost 2/3? Another name I sold a long time ago and still follow is Barclays Bank. I sold it after it had fallen a lot and it is down 80% since then.
One thing that has to happen is that the decline needs to scare people. One way to think of this is that after yesterday, enough people are either scared or not. There is no science here just fuzzy stuff but market participants will either get collectively scared enough after yesterday's puke down or not. If yes then we would be done if not then more to come. The concept here is seller exhaustion or put another way enough true fear to trigger a turn around. Just one way to look at it.
I found this in Barron's yesterday noting that the S&P 500 now yields more than ten year treasuries. This got a little attention very recently in the NY Times, I think from Peter Berstein. The Times piece spelled it out as possibility and now I guess we have it. Yet more paradigm shifting kraziness.
Lastly a word from Felix about the extent to which fund managers lag their respective benchmark indices. I have talked about this before. It is reasonable for a fund manager to believe the asset allocation decision has been made and the money they receive needs to go all in and so be down about the same as the market. It does not matter if a fund you own is down 45%, what matters is how much of that fund you own. That said, that they lag their respective benchmarks in the manner Felix says, well that it a bummer.
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13 comments:
Well, "scared" isn't the right word, but whatever it is I'm more of it now than I was at the end of October.
frankly I have reached the puke point
Where does the loss money go? There aren't an equal amount of shorts to make up for the multi billions lost. So where are those billions?
Obviously, I'm a tyro.
the yield on the S+P is based on earnings. How can you use earnings when its just anothe guess? Not a good way to look at it now.
Anon 7:20 - The stock market is not a zero-sum game; when valuations rise it is possible for a buyer and seller to both win, the one to participate in further increase the other to profit, but by the same token when valuations are falling it possible for both of them to lose, the one to to participate in further losses the other to realize their loss.
Where did the wealth go? It evaporated, it's gone.
and the beat goes on ....
Oh yeah.
(and so, it must be added, wealth can return)
to anon 8:20 from anon 7:20
Thank you for your response. Now, what if everyone sells at the same time?
I think of the race track. If everyone bets on the heavy favorite the win pool goes negative. If the horse wins, the track still has to pay, probably $2.10, and cover the bets. So the track loses.
Can this happen in stocks and if yes, who loses?
I think that trading volume is too low right now to think that the individual 401K and portfolio holders has bailed out of the market. That usually marks the bottom as they always do the dumbest thing, and that's bail out when the pain gets too great, and that's the bottom.
More pain ahead though.....
http://tinyurl.com/57gcs7
Anon 7:20/9:33 - Equity investing is comparable to a horse race in some respects but the analogy fails on a couple important grounds: a) there is no fixed pool of money and b) you can get off a winning horse at your finish line and sell it to me so I can go on to 'win' at mine.
A stock is not a company and it is not money (as in cash): it is a derivative, a claim on future earnings by a company. If the company goes broke and there are no earnings the stock becomes intrinsically worthless even though it could still be bought and sold if anyone was willing (the company's bonds OTOH might still have intrinsic worth because they have a claim on assets)
If everyone buys a stock it becomes a winning horse because there are more buyers than sellers and the price keeps going up -- betting on the horse makes it a winner you see -- so more wealth is created. If everyone tries to sell the price will collapse -- the horse is forced to lose (this doesn't necessarily have any impact at all on the underlying company, it's the stock were talking about) -- so the process tends to be more orderly, at least when folks aren't in a panic.
Stock is a way for a company to raise capital but once the stock hits the secondary markets it's strictly a matter of supply and demand, equity buyers and sellers. The money that stock represents is still around somewhere but a stock that no one wants to buy is worthless no matter what the owner paid for it and no matter what the company it is linked to is doing, the owner of the stock at that point in time is busted. Doesn't mean things stay that way, the market could come around, the stock could come back into favor, etc., but for the moment there is no value.
Shorter version, focus on the wealth the equity represents, not the money (cash) per se; the latter is what you can convert the equity claim for at any given moment in time.
I'm off, futures are starting to look positive. Hang in there everybody.
For those that are a little mystified by the "lost wealth" (and to add to the otherwise helpful explanations), the keys for my understanding are (1) there is not a fixed amount of money involved (while there may have to be a seller for every buyer, the money counted in the "system" is not fixed in advance), and (2) value is a reflection of sentiment/demand, not "worth".
If on Friday morning, I buy XYZ stock because of the announcement of their super fantastic gizmo being released, I might offer to pay $100/share (in expectation of earnings prospects or growth expectations or.. whatever). The owners of XYZ, however, might say - sorry, but we see those prospects ourselves, and they won't take less than $102/share. No sale. Current owners keep the shares.
If, over the weekend, it is learned that super fantastic gizmo MIGHT infringe on my competitor's really cool whatchamacallit, then on Monday morning, those same owners might happily offer their shares at $90. However, if I've read my newspapers, I'm unlikely to offer anything more than $85, say.
Nothing "happened" to the money represented by the share price. What happened was that the interest in being an owner of XYZ company became... less interesting.
While the share price of XYZ may have fallen in the market, the "value" of XYZ hasn't really changed from Friday morning.
In fact, the buyers that will step in and buy tomorrow (in the real market) are like those who take a different view of the possible infringement claim- they either think that the costs of the infringement are being exaggerated by potential buyers (and XYZ is now cheap relative to "true" value), or that they are willing to speculate that there will be no infringement found. (Imagine you are the designer of super fantastic gizmo, and you know that there was no infringement and you knew that some might think that an infringement exists - you might go in and "buy with both hands" on Monday... but you might wait, thinking "maybe this fear will feed upon itself, and I can buy twice the XYZ if I just let the prices fall further".
This is the anxiety filling buyers minds overnight (in the real market)...is Citi really only worth $5.07? Or have some of the potential buyers just waiting, not wanting to "jump the gun" and pay too much?
So much sentiment has changed in the past 24-48 hours, even though the change is not particularly based on new information. THAT sentiment can change back, just as quickly.
The wealth is still there, sitting behind a curtain of fear, and on top of a mountain of greed.
R in NY
By the way Rog, I felt like puking from about 2p to the close...
I'm actively trading to manage deltas, and I couldn't keep up.
At first, it felt like a gift from above: options are trading on the SDS implying an expectation that the SPY will be trading 25% lower IN 29 DAYS!!! That sort of panic doesn't come along that often...
And then I noticed that it was exactly the same panic as LAST MONTH.
So I stepped out and looked at a 20 year chart, and you can see that we have been ABSOLUTELY VERTICAL DOWNWARDS for the past 3 months.
I can see why everyone is focusing on the "support" at the Nov 2002/Mar 2003 lows... below this there is... nothing but air.
Hopefully, having a return greater than treasuries will draw some interest back into the market, but I have my doubts.
Which, as you've said, is a good thing.
Sellers are exhausted, and against a vertical decline there is very little resistance.
Here's hoping we're not about to see the mother of all head fakes...
R in NY
I pulled the trigger on my $5.00 Citi puts after a 231% gain on Wednesday. In-the-money never even entered into my mind, so I left some money on the table.
I loaded up on some KimCo puts, but Citi still nagged at me and I bought a bunch of $2.50 puts as soon as Prince whatever failed to generate a pop Thursday morning.
It's up 106%, and I don't know if I am glad or not for not pulling the trigger on those today.
I have little belief that Citi can do anything in the free market, but the government could mess me up this weekend because no bank is too poorly run or corrupt to rescue.
So I have to wake early Monday (west coast) to be ready make some quick descisions.
Then there is the other alternative, and that is the market could continue to rally and people will flood in to buy Citi (which didn't happen Friday afternoon).
People seem to be looking for the rally, and I find myself feeling foolish because it must be me who is stupid when I can't see what would support a sustained rally.
Is it the flood of good news about the economy?
Is it the piece of good news about the economy?
Is there a single piece of good news about the economy?
Is it the fantastic P/E ratios even though the E appears to get smaller and smaller?
Is credit expected to become widely available?
Is there some news that I missed?
Nice blog, B.T.W.
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