Wednesday, August 11, 2010

Stocks Tumble as Investor Confidence Deteriorates

I will have a come comments around today's market tankage in "The Bottom Line" segment of my posts.

I wanted to start out tonight with a few great Tech Ticker's on yahoo today.   The first cluster features Bill Black who was one of the key regulators that helped clean up the last S&L crisis in the late '80's/early '90's.

Bill has been very critical of both Wall St and the regulators when it comes to how we have reacted to the worst fiscal crisis seen since The Great Depression. 

I strongly suggest you watch both videos because Bill clearly describes how the fraud on Wall St has actually gotten worse instead of better.  I'll have a few comments after the videos:

Part 1

Part 2

My Take:

Mr Black flat out hits it out of the park when it comes to describing how the fraud on Wall St works.

The key issue has to do around compensation.  I have a banker friend of mine who has consistently preached this same point to me..

Here is the problem with Wall St compensation and why it needs to change:

Wall St is making a fortune each year because they can borrow at zero and then use the money to speculate in a variety of areas of the market.  They have been able to create massive amounts of capital to invest because the regulators are allowing them to not take the losses on their bad "Ponzi style" loans.

Mr. Black does a great job explaining the bond game that I have regularly talked about on here for the past year which is borrow at zero and buy the long bond and thenpocket the spread.

In this "perfect world": Wall St is able to line their pockets with billions of dollars in profits. 

Now here is where the fraud and corruption kicks in:

What the regulators should be doing is forcing Wall St to use these profits to write off the trillions in toxic assets that the taxpayers are now responsible for after we bailed out the TBTF banks.

Instead, the SEC has totally looked the other way as Wall St has chosen to line their pockets in the form of bonuses instead of paying off their bad debts.  The regulators have done nothing to stop this because they are bought and paid for by Wall St.

This is disgusting because without the taxpayer they would all be toast!  Not one dime was sent back our way as Wall St made near record profits in 2009.

Wall St usually pays out about 50% of their profits in the form of bonuses. Goldman Sachs made $5 billion in Q4 alone last year.  This means over $2 billion went straight into their pockets in the last 3 months of 2009.   This is an outrage and it needs to stop!

How can this country allow Wall St to carry bad loans at full value via fraudulent accounting, drop rates to zero at the savers expense so that the banks can make billions of dollars, and then not hold them accountable for paying back losses that the taxpayers are eventually going to be forced to eat as this crisis intensifies?

This is obscene!  Where is the SEC? 

Kudos to Bill Black for exposing this disgusting fraud.

Another 30% Drop in Home Values by 2014?

Richard Suttmeier of sure thinks so.  Richard has been a credit trader on Wall St since 1972 before starting his site so he is someone that deserves your attention:

My Take:

As you can see we are basically just playing "kick the can" with the housing market until the elections pass.  The Fannie and Freddie nightmare continues to hang over the market and stay off of our balance sheet.  This monstrosity needs to be wind down but no one wants to touch it before Novemeber,

As Richard notes, the loan modification failure has really slowed down the price adjustments in the housing market.  Extend and pretend right?

Foreclosures will now begin to accelerate as these loan mods fail at the same time others decide to walk away from their homes as they lose their jobs.  Adding to the troubles in housing is the fact that the community banks have no desire to do more loans because their books are filled with losses.

The lack of home building is doing nothing but adding pressure to the jobs problem.  Our economy became highly dependent on the housing market for jobs.  This just makes the housing problems worse.

CNBC on Falling Home prices

There was more news around prices on CNBC.  As you can see below, 25% of sellers have now dropped their price which was the 4th straight increase:

Diana also notes above that the price stabilization seen in Q2 of 2010 is an aberration  because the comps from a year ago in Q2 2009 were mainly foreclosure sales that were priced much lower.

What can I say here folks? Housing is basically dead.  We all need to accept the fact that it's over and prices are not coming back for a decade or more as we clean up this bubbly mess.

The Bottom Line

It would be easy to blame the drop in equities today on yesterday's Fed decision.  I believe it goes much deeper than that.

The confidence in the economic recovery is rapidly losing steam as gigantic holes in the dam continue to get exposed.  There were several other bad pieces of news that I couldn't even get to tonight.

The Fed painted a pretty gruesome picture on the economy yesterday and I think many are beginning to feel hopeless as they realize that the Fed has run out of bullets.

People are also starting to lose faith in Wall St.  Money continues to pour out of index funds and into treasuries which soared once again today despite an average 10 yr auction results that were announced this afternoon.

IMO, the macro economic data combined with the lack of confidence from the Fed has killed the positive psychology around the economic recovery.  As Dr. Shiller from Yale loves to point out:  Psychology is very important when it comes to the markets. 

The anger and frustration felt during a depression can just as powerful as the mania that we all feel during prosperity.

We had an incredible 27 year run of prosperity as this country flourished by borrowing from Peter to pay Paul.  The problem is Ponzi financing can only last for so long because it's unsustainable.  Just ask Greece!

The evidence is clearly beginning to show that all good things must come to an end and it appears that our time has come.  We must begin to start taking our medicine and cleanse ourselves of the excesses that have been built up over the last 27 years.

Disclosure:  No new positions taken at the time of publiching.


getyourselfconnected said...

Yes, today was quite the wallop, but I cannot be sure it was not a hissy fit by Wall Street to pressure the FED/CONgress to do something. We will have to see how the action plays out.

Jeff said...


Ithink it was pure panic. If the Fed acted in between meetings it could be viewed as a panic move.

I don't think there is much more they can do. QE 2 is coming but I they at least have to wait until the next meeting.

Stocks are vulnerable here especially if jobless claims are bad again tomorrow.

Cisco missed badly after hours too.

ES is -6. YOu would have expected a bounce tomorrow after today's pounding.

I think we dump hard again tomorrow.

Herb said...

One word of advice: Plastics! Wait, no, spell-check! :-)

Unfortunately, we will never know what the SEC is doing as they are not required to respond to Freedom of Information requests thanks to the 'reform' bill.

Loan mods are great and wonderful, but if the homeowner doesn't have a job, it isn't going to do a bit of good. As more and more people exhaust their unemployment, its just going to snowball.

Jeff said...



The housing market is so screwed beyond words.

I am afraid to see what it looks like 5 years from now.