Monday, September 22, 2008

Reality Slaps Wall St. in the Face

Good Evening Everyone!

What a day today. Stocks tumbled today as fear and uncertainty continue to send shivers down the spines of Wall St. traders. The DOW and Nasdaq both tumbled giving back all of Fridays gains.

The bailout is already affecting the markets and it hasn't even been passed yet! It appears that there is no way to stop the passage of this bill. We are already seeing the consequences of such a costly bailout. One of my biggest concerns regarding this bailout is the effect it will have on the US dollar.

It didn't take long to see what the world thought of our bailout. The dollar plunged, sending commodities through the roof. Oil rose a record $20 to an intraday high of $120 barrell before pulling back to $115 at the close.

As for the dollar, a picture speaks a thousand words:

My Take:

As you can see, the dollar plunged today as traders anxiously wait for the details of the bailout. I can only imagine what the dollar will look like after the bailout gets approved. This is what happens when you are about to add a trillion dollars to our national debt.

Bailout Update

It appears Wall St. is getting increasingly concerned that the bailout won't as friendly towards them as first thought. The Democrats seem to be pushing for drastic regulation over Wall St, and a drastic reduction in CEO compensation.

Here is the latest on the bailout:


Bush team OK bailout terms;

Stocks sink

Monday September 22, 6:00 pm ET By Julie Hirschfeld Davis
Bush administration accepts some of Dems' demands in bailout bill; Stocks plunge, oilsoars
WASHINGTON (AP) -- Scrambling for a quick accord on the $700 billion bailout, the Bush administration and leading lawmakers have agreed to include mortgage aid and strong congressional oversight along with unprecedented help for failing financial institutions, a key lawmaker said Monday.

Unimpressed, investors sent stocks plummeting anew, pushed oil up $16 a barrel and propelled gold prices ever higher as they searched for a safe place to park their money.

Under other additions the Democrats are asking to the administration package, according to a draft of the plan obtained by The Associated Press:

-- Judges could rewrite mortgages to lower bankrupt homeowners' monthly payments.

-- Companies that unloaded their bad assets on the government in the massive rescue would have to limit their executives' pay packages and agree to revoke any bonuses awarded based on bogus claims.

The proposal by Sen. Chris Dodd, D-Conn., the Banking Committee chairman, would give the government broad power to buy up virtually any kind of bad asset -- including credit card debt or car loans -- from any financial institution in the U.S. or abroad in order to stabilize markets.

But it would end the program at the end of next year, instead of creating the two-year initiative that the Bush administration has sought. And it would add layers of oversight, including an emergency board to keep an eye on the program with two congressional appointees, and a special inspector general appointed by the president.

The plan also would require that the government get shares in the troubled companies helped by the rescue.

Wall Street didn't seem comforted. The Dow Jones industrials were down nearly 400 points near the end of the trading day.

Investors were uncertain just how successful the administration's plan will be in unfreezing credit markets, which many businesses depend on to fund day-to-day operations, and for propping up the still-weak housing market."

Final Take:

What hit the markets today was the reality of deleveraging. The days of making big money via leverage are now over. Goldman Sachs and Morgan Stanley are now just banks folks.

This new reality forces the pigmen to be leveraged less than 20-1 on each dollar of capital versus the 30-1 or higher leverage they have been using the past several years. This is going to kill their earnings power, and their stock prices will now be forced to reflect this.

Folks, this leverage isn't just a banking problem. If they can't lend at 30-1 on capital, there will be much less money in the economy. The investment banks essentially were the capital markets on Wall St. If you wanted to raise large amounts of money to buy anything in any area of the economy, this is where you went to get financing.

This vehicle of borrowing big money is now essentially gone. Because the investment banks now must lend using lower leverage, the value of all assets will fall dramitically because there simply won't be near as much money available for lending!

In this new lending environmnet, how are overpriced assets like 700k McMansions ever going to keep their value? The answer is they can't.

This is why you saw the home builders get creamed today.

The Housing Time Bomb Warning!

Now is nowhere near the time to buy a house. Please please please wait until the smoke clears before even looking. Don't get sucked into believeing that prices are down and you its time to start shopping. This may be the case in a few selective areas in parts of Florida, inland California, and the rustbelt where prices are down 50%.

Please wait to buy if you live anywhere else.

Bottom Line:

Our over leveraged ponzi finance system has come to a complete halt. Wall St. is now shivering at the thought of a bailout versus cheering for one. I think this may end up being more of a "bend over" for Wall St. rather than a "bailout".

Stock prices have nowhere near priced in the reality of a lower leveraged economy. Earnings will drop dramatically in most sectors because there is going to be much less money in the system.

This new reality has not yet been priced into equities.


Jeff said...

Just a warning to all that are using ETF's to short.

(SKF) which shorts financials is having problems. Because the financials can't be shorted, there are issues finding counterparty risk for the trades.

SKF should have shot through the roof because the financials were killed. SKF ended up closing flat due to these issues.

I am going to see what it does tomorrow and close it out if it continues to trade like it did today.

Crazy times out there folks!

Minton Mckarkquey said...

It's all over, Jeff, it's all over.

Admittedly lifting from my blog, but I predict:

* The proposal will get passed and both sides will claim they negotiated victory as they make King Paulson and Henchman Bernanke the most powerful people on the planet.

* Banks will dump all their bad debt and carry on, business as usual. In a couple of years, they’ll buy that debt back from the taxpayer at pennies on the dollar and make staggering profits.

* The next administration will be unable to achieve anything due to the collossal debt (minimum $20K per person). Healthcare, social security, education, Iraq - forget it all.

* The dollar will be seriously devalued due to the endless printing of money and double-digit inflation will be rampant.

* Unemployment and crime will rise substantially, and foreclosures will continue to rise (especially now banks can foreclose, kick out the poor bastards, and then buy the debt and the house back from the RTC for a lot less!).

* Most of the larger banks will merge and intensify overseas activities, milking the US taxpayer in an over-regulated new environment but enjoying free reign in other economies.

* Hedge funds, pension funds and other large investors will evacuate from US currencies and stocks, making the system more fragile and sensitive to minor shocks.

It's going to be a sh*t show of historic proportions and probably send all the investment banking business to Europe or Asia. All because of rich, greedy criminals broke the greatest financial system in the whole world. Sad times.

Minton Mckarkquey said...

FYI, we've just printed our Commemorate Hyperinflation Dollar for collectors and people needing fires everywhere:

Avl Guy said...

Call me stubborn, but I simply don't see Paulson's Plan working. If he gets major oversight from Congress, he'll have to ditch his plan to buy high and sell low. If the Foreign Central Banks dont ape his plan, he'll get entangled in the inter-woven risks of global debt. If foreign creditors dont pony up the credit to fund this rodeo, im not sure how far out the gate he even gets.
And finally, banks’ lousy assets arise from collateralizing them with real estate that's still deflating. Home price deflation will still be running downwards to chase price affordability for J6P who's watching his earning power decline due to recession (job losses) and inflating prices for food/energy, who's shopping less, and who still cant pony-up the 20% down pmt of $50k to close on a mortgage for a $250k house.

How on earth is buying up sickly debt gonna stop the core problem of falling real estate valuations and a slowing economy? And now Paulson's rattled the dollar and oil, of all things. Even dems/Dodd’s changes don’t impact the core causes. Neither stops mortgage defaults from spreading deeper into the prime mortgage market.
Well, at least the plan is a great 2-yr 'Gubmint Jobs Program' for Wall Street's unemployed MBS traders.

It seems this story is still unfolding on its own terms regardless whether the Plan passes or not.

Minton Mckarkquey said...

Avl - EXCELLENTLY stated. Truly. Couldn't agree more.

Avl Guy said...

BTW, at 4pm here in Asheville, NC, I passed 8 empty gas stations, 3 more with gi-normous lines, and settled for one w/short lines where I still got into a verbal exchange when someone attempted to cut in front of me - on foot no less, carrying 2 mini gas cans (I didn’t make this up).
What's this have to do with Paulson's Plan & the Dow Diving?
I'm seeing how jittery J6P can get in this new world of 24/7 screaming headlines of bank meltdowns.
As much as I believe we'll never descend to guns & pitchforks, I have to admit it wont take much to trigger ...shall I type it...a b a n k r u n by these masses, and captured on U-Tube and teleported nationally.
By 5pm, the Asheville police were at the remaining gas stations that had gas. It's quite ugly out here.

Avl Guy said...

[reading is believing ]

Gas Shortages Force Asheville to Cancel Programs

Frustration Grows At Gas Stations
staff reports published september 22, 2008
ASHEVILLE – Tempers flared at one Asheville gas station, where officers were on hand to keep the large crowd under control. Meanwhile, many area gas stations were low or out of gas Sunday

Jeff said...

Minton and Avl

Well said guys. This is a giant cluster f*ck. Excuse my language but watching this country fall apart upsets me.


You are dead on with everything you said.

Your predictions about the investment bank going overseas is exactly what I think will happen.

These pigs will go to any country where they can leverage back up. New York will never be the same.

I am sure Dubai would welcome them with open arms. The US risks becoming a "has been" in the financial world.

Text books will be written about how the financial capital of the world blew it because they refused to regulate their financial system. This is TRAGIC.


Holy crap, are you telling me the gas lines from the 70's are coming back?


All hell is breaking loose gentleman. Buy some gold!


Jeff said...

Join the cause.

Are you guys FedUp?

Jeff said...

It seems traders are not liking what they hear from the the Paulson/Bernanke senate grilling on the bailout today.

DOW is down 85 points. I will have a post up after the hearings.

Anonymous said...

Any reason that both Fannie Mae and Freddie Mac stock is up about 60% with heavy trading. Is there something going on there that we don't know about. Thought those shares were worthless.

Jeff said...


I noticed that too. AIG is up big too althought its pulled back a little. I have no idea why.

Maybe America is starting to like financial socialism :)