Thursday, October 09, 2008

She's Goin' DOWN Captain!

Well, my previous post predicting Dow 9000 no later than year end was way way off... It only took 3 days. Unfortunately, I'm a terrible trader and still reeling from the fact that I puked my short position of a lifetime at the interim top after the government changed the rules back on September 18th - so I never re-initiated my short position - but I've been lightening up my equity exposure all the way down.

Everyone seems to be expecting a capitulation rally of massive size and scope - and every day where the rally doesn't happen is exceedingly more of a bearish indicator. Like yesterday - when the Fed and Europe emptied their holster with one of their last bullets: a coordinated rate cut: and the rally fizzled quickly. Then today - CNBC anchors were high-fiving when the Dow was up 150 points this morning- REALLY!??!?! The Dow sells off 2000 points in a week and you think a 150 point rally signifies a cessation of fear? Good luck with that. Anyway, let's get to the real commentary:

-Greg Mankiw has a very good idea about how the Treasury could go about injecting capital directly into banks and financial institutions that would prevent conflict of interest (like Paulson giving all the money to Goldman while he let Lehman die) and lessen moral hazard:

The government can stand ready to be a silent partner to future Warren Buffetts.It could work as follows: Whenever any financial institution attracts new private capital in an arms-length transaction, it can access an equal amount of public capital. The taxpayer would get the same terms as the private investor. The only difference is that government’s shares would be nonvoting until the government sold the shares at a later date.This plan would solve the three problems. The private sector rather than the government would weed out the zombie firms. The private sector rather than the government would set the price. And the private sector rather than the government would exercise corporate control.Why would an under capitalized financial firm take advantage of this offer? Because it would need to raise only half as much capital from private sources, that financing should be easier to come by. With Warren Buffetts in scarce supply, the government can in effect replicate them, by pigging backing on what they do.

Mankiw is a professor at Harvard, so there is even a chance that the doucheballs in Washington might listen to his suggestion.

-The Gothamist has a must see picture of the Wall Street Bull's blue balls, titles "Wall Street Really Needs Relief."

-On Paul Kedrosky's blog I found the video below which does a pretty good job explaining exactly what went wrong with CDO's (Collateralized Debt Obligations)

Crisis explainer: Uncorking CDOs from Marketplace on Vimeo.

-How can anyone say our economy is fucked when the VIP Club is launching a $1,000 lap dance?

“Since the market has been going down, our business has been going up — it’s unbelievable,” said Sam Zherka, the owner of the V.I.P. Club in Chelsea, who estimates that about 80 percent of his clients are Wall Street types...A lot of guys are losing their shirts in the market, and they are coming in droves.” Business is up around 20 percent, he estimated. “We’re an upscale gentleman’s club,” he said disdainfully.

In a moment of shrewd business, perhaps, Mr. Zherka and the club decided to introduce a premium product: the $1,000 lap dance package. The package will buy a 20-minute lap dance, a bottle of Dom PĂ©rignon and a private Champagne room. Not to mention, as Mr. Zherka did, they also “get to keep the girl’s G-strings.”

Keep the G-string... ugggh... I mean, what would you do with it? Use it as an eyepatch for a Halloween costume? Give it to your cat as a treat? Sorry - I just threw up in my mouth. It reminds me of an old axiom a former colleague of mine had: "If it smells like nova, turn her over."

-The NY Times also had a big piece on former Fed chairman Alan Greenspan. Greenspan was a free-markets believer who stuck to the basic tenet that the market would be self regulating - that the BUYERS of all these fancy products Wall Street created wouldn't be buying them unless they were worth the risk. He was flat out wrong about that. His policy of easy money supply in the wake of the collapse of the internet bubble replaced a relatively benign (outside of the stock market) internet stock boom and bust with a far from benign housing bubble of massive proportions. The problem is, when People bought AOL at $250/share and lost 90% of their money, they realized that there was nothing they could do. On the other hand, now, when people are down 30% on a house they bought with 5% down or less because someone gave them a loan which they never should have received - well, now they somehow feel that they are owed something by the System. I think I've already made it clear where I stand on that.
But please, Obama - please stop blaming the Bush Administration for the problems. They would have happened regardless of who was president, and there are a variety of people we can blame: The people who took out imprudent loans, the banks who made imprudent loans, the Government Sponsored Entities who guaranteed the imprudent loans, the conservative politicians who pushed for deregulation and figured the free markets would work on their own, the liberal politicians who pushed for the unreasonable goal of home ownership for everyone and exacerbated the debt problem (and who continue to suggest more debt as the solution), the ratings agencies who completely failed in their risk assessments, the people who bought the derivatives instruments and used extreme leverage to create a systematic risk to our country, and finally, the SEC - who first increased the maximum leverage allowed (At the behest of current Secretary of the Treasury Paulson, who was then at Goldman Sachs) and then failed miserably in its oversight roll and was probably most charged with preventing such abuses. So anyway, Barack - just say we have a problem - don't blame Bush... That's so Pelosian.

-I was talking with a friend of mine who is very in tune with the markets 2 weeks ago and she asked me, "When do you think gold and S&P will cross?" "A thousand," I replied quickly - the S&P was at roughly 1200 at the time, and gold was around 870. "Yeah - I have around 900 as the level," she replied, and BOOM - today it happened - gold crossed over the S&P 500 at roughly the 910 level. Barry Ritholtz also wrote about this tonight.

-Finally, commenter "The Bartender," who is an inside member of the Dynamite family, suggested the video below, which we had all gathered to laugh about last December at Holiday time. Seems like the US Peso could be next...

Enjoy the ride.


Anonymous said...


This video of Ghana is extremely poignant, provocative, and a foreshadowing event that will probably happen here sooner rather than later. Kind of reminds me of Kenya which will be our next foreign frontier when the annointed one is inaugurated, come January, 2009.

Catchy tune and it had me dancing in my office throne while my business continues to dry up.

Keep up the excellent work.

Your buddy from the HOT AZ.

Matt said...

It occurs to me that if someone can get an "Economy Blogger" tournament going, you're an odds-on favorite to win that one, even the the Poker Bloggers are a tougher crowd. ;)

Anyhow, I'm enjoying your economy posts, and while I think Obama is certainly the man for the job at this point, you're dead on. We have enough blame to go around. But that's economics. Hell, if McCain wants to call Obama a terrorist because he went to a dinner party at Ayer's house once, it seems fair game to blame Bush (or McCain, for that matter) for the meltdown. Makes about as much sense.

Keep up the good work.

Anonymous said...

Good stuff. I like the wine glass simplification of the CDO and CDO-squared (CDO's made up of CDO's). You think all the investment managers who bought these instruments would have done it if they had understood the wine glass concept? Seems they are the real ones to blame, the people that actually bought this sh*t. Banks will do whatever they can, create whatever they can, to make a buck. That will never change, regardless of new regulation. That's just pure capitalism. Can you outlaw capitalism?? I'm sure Paulson will try. New Bill #50678 - "Anything construed as capitalism will be punishable by a fine and prison sentence."