Monday, September 29, 2008

What a mess!

TSX down 840; Dow down 777; S&P down 106; Nasdaq 100 down 10%

What a mess! This is the kind of stuff that I was worried about when I wrote this, this and this.

While I did not expect the bailout to get rejected today, I mentioned back on the mother of all bailouts that a crash was a definite scenario. Today was not a crash but perhaps a mini-crash or a slow crash. I wish that Paulson & Co hadn't manipulated things so much that I could have been more short but the volatility is too intense.

Today was the first time in this bear market that things really got panicky. Not enough panic to set a bottom in my opinion. But maybe a bottom for 2 days to 2 weeks if we get any type of good news (ie government manipulation).

However, for there to be a real bottom, IMHO, we need it to be one without government intervention, in that sellers have to become exhausted naturally.

I feel bad for those affected negatively by this (and it will probably spread to affect everyone including yours truly). Hopefully, the readers of this blog have taken note and spread the word to friends and family. Cash is king, debt is bad.

We have had a long uninterrupted boom (with a brief hiccup around 2001) for about 17 years. We are only about 1 year into this and to expect a magic wand to be waved and everything to go back to the way things were before is folly.

Every single asset class except cash, short term government bonds and selected currencies (Yen, the US dollar) and maybe gold are holding up here. Everything else (stocks, most bonds, real estate) are getting annihilated. I suspect that we are getting close (in time but maybe not price) to a multi month bear market rally that should start in late October or November and should last into January or so. But we have a few more storms to go before this financial hurricane lets up.

Expect to see one or more of the following government steps announced on Tuesday: temporary ban on all short selling, return of the uptick rule, there is the talk of the elimination of much of the credit defaults swaps out there. Also a global interest rate cut can not be ruled out any day this week. Plus, this bailout will likely get reworked and go for another vote this week. All these measures will ultimately fail though but may cause another short term spike.

By the way, is there anyone out there that can still say that Canadian housing is going to be up this year (with a straight face) or that a Canadian recession is not a distinct possibility?


jen said...

Spot on about the market manipulation.

I made this comment on another blog, and I'll recap it here:

How much of the decline today was due to the lack of shorts? I've heard here were multiple instances this afternoon of bids literally disappearing on individual stocks.

Let's also remember that 40% of today's losses occurred BEFORE the announcement that the bailout legislation had failed.

In fact, the Fed threw $630 billion into the market this morning ( before the vote, and yet global markets fell precipitously anyway, and in fact tanked after the vote.

So- Paulson's plan was $700 billion, and the Fed injected $630 billion (almost the entire amount proposed) and failed to "fix the problem".

The markets will not recover in any meaningful way, and credit will not start to flow, until investors regain confidence in the system. Right now there is absolutely nothing to trust about the "free market" system. There is, however, a flicker of hope now that this ridiculous bill has been struck down.

Thanks again for your thoughtful analysis of recent events, and their possible impacts on Canada.

Adil Burney said...

thanks. I think that 40% was Euro banks effect and 60% was the vote failure roughly. Therefore, if a vote passes, you should get some or most of that 60% back.

Hard to quantify the effect of lack of shorting but there is an effect. Say you are a hedge fund that shorts stocks and uses the proceeds to go long. You are in cash. Also, by burning the shorts/hedge funds and changing the rules of the game, you are removing liquidity and also removing short covering that would have helped probably a little at the close yesterday.

The ridiculous bill will be back in some form.

Also, remember that the $630 is just repos so that in theory at least the mney has to be paid back. Some of the 630 is probably old money (ie repos that expired yesterday and are rolling over).

Anonymous said...

I'm sure you know about this, but I thought I'd share:

Oh, happy day.