Based on my figures, points below 850 on the S&P 500 are ... looney territory.
During the property crisis in Hong Kong and associated attacks on that market, the authorities essentially monetized the equity market for a time...
Ben could buy some time for Paulson, that way. He might not have enough powder, but if he uses it in the right ways, he could get pretty far.
For instance, I've always thought that buying up 700 billion in sub-prime securities was an option for him and a place to start, if other approaches didn't ... it'd shock the hell out of everyone and the dollar might wobble, but it would be a blowtorch on 'the freeze', no doubt.
Friday, October 10, 2008
Reminder
Thursday, October 9, 2008
Fireside Chatting Stock Market Investors
Let's try to pull a Feynman (that I should be so good) and do the current crisis in three parts.
1. The end of the era of easy credit and fraudulent lending has brought about a crisis in banking, that has as its backdrop shoddy credit underwriting of mortgages and the multiplication of those risks, through the use of derivatives. The fall in housing prices is also affecting the prime market and the commercial market. All these things are putting enormous strain on banks.
This may "cost" the market 15-30%, from the market's recent highs. I'm guesstimating that about 15%-18% of that has already occurred, with the rest ... justifiably likely only in the event of collapse of the US's financial sector.
2. The normal credit creation process has been interrupted, because of a lack of confidence that financial partners are sound and because of a massive financial sector deleveraging that is going to, as people seek safety.
This may cost the market only a small amount, but a spike in energy and food prices has further crimped the outlook. That crimping means even less confidence, to the point that people start to think that a global recession is on the way.
A recession discount might run to 15-20%, from pre-recession highs. The discount for a super-severe recession would be more, but it's too facile to imagine that the whole world is going to melt, even though you can certainly scare yourself to death, if you want (it's always the scariest when the roller coaster rounds the top, and you feel like you are looking into the abyss, right?).
3. Last, the markets always revalue to the 'worst case' scenario, when bottoming out. The equity risk premium has shot up to its very long-run value of somewhere around 9.5% (measured at S&P500 @ 900). This is the prospective return on equities that is demanded for investors to assume the extra risk of them.
Most of this amount is already caught up in the discount for part two. It might be another 10%++, depending on how things go. Despite being very open ended, this part is not completely unbounded, however. Still, you don't want to see rampant pessimism or free-fall. It's important that fundamentals 'take over' at some point on the way down (or up).
When you add those three up, you start to see why we are where we are, in terms of market revaluation, and think that the bottom is coming, soon. We've discounted a crisis and a global recession and now we are fiddling around with how much people are going to panic as the market finds a bottom and whether there is a lot more of the banking crisis still to come, i.e. whether we are closer to to the high-side of the estimate or the lowside.
Paging Joe Lieberman
So, Joe, now that the McCain campaign is in full smear mode, how do you feel about having thrown your lot in with the GOP strategists running the McCain campaign?
Sticking by the tactics of your bff?
Who cares about Conservatism?
AS has all this hand-wringing about Conservatism, going on, related to what's going to happen after the Conservatives sacrifice McCain to their Moloch (assuming Obama wins).
Who cares?
First, the idea of a resurgent Democratic party a la FDR is ridiculous. FDR commanded the Party, even gave it a new song. There is little or no indication that Obama can, wants to, could learn to, or will. (And that could be a good thing. Maybe Barack can be more like Ike...who knows. He could usher-in and define a new mode of politics, if he doesn't get too insulated in 'the pocket', too soon. We'll see. He seems pretty deep in the pocket to me, already - and the military have yet to give him their full shock-and-awe treatment).
Second, believe me, progressivism in America is weak, not strong.
Here's a case in point. During the primary debates, everyone was falling all over themselves about voting for the GOP's bankruptcy bill. I think this is the one in which interest rates weren't capped, but allowed to wander up to 30%, if credit-card companies felt the need to put the screws to someone.
So, did the unwind of that provision make its way into the recent bank-rescue plan?
I'm not even sure it was on anyone's mind, frankly, even though Hillary Clinton deeply embarrassed herself on national television over the issue ... ("I voted for the Bill, but was glad it didn't pass.").
There are 1,000 little examples and a slew of people tracking and targeting Bush's "blue-dog" Democrats.
Third, and last, don't forget that 45% of the nation is still willing to vote ... GOP. That's almost one in two, who are so headlocked that they are willing to put a political party that has failed on almost every metric imaginable over the past eight years, in spades, back in a leadership role!
The best thing that could happen to Conservatism is that it could fracture, putting pressure on Liberalism to do the same. The worst thing going in America is the two-party system. It's turned inimical to accountability and excellence, and, despite increased transparency in governance, is still smothering what little democracy there is left in America.
No more than words ...
Heard this on Colbert while flipping, late last night. AS finds the words, written by John Cleese.
Ode to Sean Hannity
Aping urbanity
Oozing with vanity
Plump as a manatee
Faking humanity
Journalistic calamity
Intellectual inanity
Fox Noise insanity
You’re a profanity
Hannity
Aping urbanity
Oozing with vanity
Plump as a manatee
Faking humanity
Journalistic calamity
Intellectual inanity
Fox Noise insanity
You’re a profanity
Hannity
I assume this was written after Hannity's train-wreck with Gibbs over Ayers.
Cash Dividends on Stocks -- Now Better than Yield on Bonds
WHEN NOT TO BE RISK-AVERSE - FINDING THE RIGHT PRICE
The cash dividend yield on stocks in the S&P500 is fast closing in on the yield of the five-year treasury note, which is a mere 2.8%.
That means, if you don't need to use the money for five years, you can get paid in cash a yield more than you would get from a five-year treasury note.
The "buy" signals are starting to flash brighter and brighter for those with "strong hands".
Even allowing for some really steep cuts in dividends, adjusting for a 30% fall in cash dividends that lasts for three years, one still does better than the three-year treasury, which is yielding today just 1.94%.
Right now, no one expects the upcoming global slowdown to be a grinding three-year process that would require cuts to be that steep for that long. Meanwhile, every Central Banker in the world is working overtime to reflate your equity investments, so it's a rational deal, if you can shoulder the risk(s).
Why Not Call On John McCain to Fire Rick Davis for ... Lies
McCain went on national television and affirmed one thing, when he was just wrong and his campaign manager was on the dole as a lobbyist.
Either McCain should come clean about his error and indicate that he knew about the relationship and it is okay, or he should ask his campaign manager, Rick Davis, to leave.
I don't see the middle ground.
As long as the far-right is running ...and running ... and running with Ayers, I don't see any reason not to press the issue, "as a matter of truthfulness", "straight talk", and trust in government officials.
Outside the Box
EVERYONE CANNOT BE RIGHT
In other words, the entire value of the financial sector (not just banks) in the S&P 500 is around just 15%. If all banks went to zero tomorrow, the index would only fall 15% further ...
There are some prominent economists who believe that equity stakes in large banks are ... valuable. The market, interpreted one way, is saying something else, perhaps.The VIX, the volatility measure on the S&P500 broad stock index, is around 55%, today. That says that the standard deviation of the S&P500 is 55%, annualized.
Assuming a distribution, you reasonably interpret that to mean that the S&P could drop 55%, without 'extraordinary' circumstances.Now, I'll tell you, that price is so high, it is higher than if the value of all the equity of all the banks in the index was worth nothing. In other words, the entire value of the financial sector (not just banks) in the S&P 500 is just 15%. If all banks went to zero tomorrow, the index would only fall 15% further ... that's way less than 55%, right? Both cannot be right.
What to do?
BSDs UNITE
Sell covered calls, as big as you can, outside the financial sector ... If you are even more brave, sell puts. If you are just normal, just go long technology (or a diversified set of high-quality names). If you are creative, buy some high yield bonds. If you are a professional, pick some winners and buy them against the broad indexes. In other words, there are a lot of things to do.
The risk if you are wrong? As I see it, the stock market is already discounting a normal sized recession, plus or minus 4%. Your risk is really that the U.S. Economy collapses. Yes, there are extraordinary pressures on over-leveraged consumers and national finances are out-of-whack in a world that is contracting, but U.S. business balance sheets are in really good shape (as best I can tell). The chance that the financial system's equity is worth nothing is non-zero, but the chance that the entire financial complex ceases to function is slim, judged at this juncture.
The Real Action
Guarantee for the Interbank Market?
REMOVING COUNTER-PARTY RISK TO CALIBRATE THE 'CREDIT CRUNCH'
Yes, good idea. But, as we've been (smugly) pointing out, think about what will happen if you are "wrong".
The implementation of the Treasury's new authority under TARP is weeks away, and rightly so. This means that, in the interim, the Fed could step up and say, "we'll carry the bag, paper over the problem, until the big medicine man comes", we'll guarantee the inter-bank market for these types of paper ... for a short, indefinite term, not less than 90 days.
Now, suppose the Fed did this, yet the inter-bank lending rates did not come down. Since credit / counter-party risk has been removed from the equation, the observed rates will be a measure of the true unwillingness to lend, a true measure of the "credit crunch".
Knowing that might help policy makers calibrate their next response(s), but such an outcome would not immediately reassure the markets (it might even spook them, given how some economists wing-flap). Together, that implies that the confidence-building benefits of such a clever move ought not to be oversold.
The "It will take time" Fallacy
How are we to assess Bush-Paulson's appeal that it will take time for their plans to work?
I'm not sure why that would be true, apart from logistics. Either you have confidence or you don't, right?
The only time you need to "rebuild" confidence is when you don't trust the figures you have and you require a new record of sound performance be built, to gather six months or a year of data that your counterparties ... haven't failed today, to put it bluntly.
If The Plan requires a re-set of that kind (empirical, rather than de facto), it's probably not the best one available. Markets typically turn on a dime, when confidence is properly restored...
McCain's Desperately-Late-on-Arrival Mortgage Buy-Up Plan
CONCERN OR DESPERATION?
McCain's new strategy, his latest "erratic-ca", apparently, is to flank Obama ... from the Left.
McCain's campaign wants to buy up / refinance mortgages (McCain himself has probably never paid a mortgage, I'd guess). This isn't unlike what some non-hold-your-nose liberals wanted from the outset, something akin to the Depression era Home Owner's Loan Corporation.
"More capital" is on the list of things-to-do, but it may not be the first or the best thing.
Yes, it could be overkill, but I rather support this approach, albeit in a far more targeted fashion. It would have to be limited to *some* sub-prime and alt-a loans with ridiculous step-up rates and, possibly, defaults on some prime loans.Nothing - nothing - on commercial real-estate, whole loans, and a slew of other securities for which the government has no business or competence, IMHO, to get involved with as a matter of public policy. It was ... misguided to give the Treasury secretary the right to buy anything.
Also, it was misguided to give the Treasury Secretary the right to buy up mortgages at face, rather than offer a discount only for them, to force the Treasury to share the burden with both lenders and borrowers, so to speak.
EQUITY IS THE ANSWER? FINDING OTHER FORCE MULTIPLIERS
There are some who are very, very keen on injecting capital ... as a way to restore confidence?
"More capital" is on the list of things-to-do, but it may not be the first or the best thing.
It really, really depends on the problem one is trying to solve, the root cause of the loss of confidence. People need valuation certainty, liquidity (risk-management), and transparency to risks ... think of these as "force multipliers" that will stretch even a small amount of capital a long way.
What's more, I don't particularly like the government with large amounts of equity for any prolonged period of time. My objections have more to do with the inability of politicians to keep from meddling and the potential for corruption, than any objection in principle to collective ownership.
Wednesday, October 8, 2008
Paglia Finds Palin "Bracing"
To augment Andrew's opinion, all I can add is that I'm simply lost in Paglia's screed on Palin.
If I'm too caught in the "tedious, hackneyed forms of ... upper-middle-class syntax and vocabulary" and too out-of-step to observe definitively that "sex today ... has become brittle and superficial", then color me purple.
I agree with Andrew. Palin, to me, is no Shavian incarnation. She seems rather ill-prepared and dangerously uncentered (all those white lies), no matter how well she fills Camille's world with her "energy", aura, aroma, or leafy goodness.
Whatever the case, propagating the meme that Palin is somehow getting a "raw deal" from egghead liberals will mean that Paglia's "vote" for Obama will likely be canceled out ten times over, if history of such 'sympathy votes' is any guide. Gee thanks, Camille.
Palin's hacker
Trial is set for Dec. 16. He faces a maximum of five years in prison, a $250,000 fine and three years of supervised release.
Do we prosecute everyone who hacks someone's e-mail?
Whatever happened to the folks who gained access to those passport files at the State Department?
Afternoon Pensée
DRIVING AROUND A BLIND CURVE
...AND GETTING A MANHANDLE ON LONG-TERM MARKET EXPECTATIONS
If we had done a proper stimulus package back in April, we'd be talking about the jobs it would be creating now and in the next quarter. Several people, including yours truly, suggested a long-term view, one that involved significant infrastructure and targeted industry (alternative energy projects) spending and subsidy.
Of course, some economists argued and got the short-term, tax-rebate, to the tune of 1-1.5% of GDP, as I recall. The political will didn't exist to double it, by levying a windfall profits tax on the oil companies.
Since Meagan McArdle was just making sound points about cognitive errors, I'll ask those economists now, what was their "Plan B"? To wash-rinse-and-repeat?
Note(s): when you don't know the scope of a problem, it's risky to go for the 'quick fixes'. As with driving around a blind curve, leave yourself and out! Put another way, never be afraid to ask, "What if I'm wrong?".
In the long-run, we're all dead
CENTRAL BANKS RESPOND TO 'BAT SIGNAL' IN THE SKY
BOE ends speculation about UK bank solvency by ... throwing a giant puke-bucket in front of them. It will work.
A rare, co-ordinated policy rate cut helps the forces of reflation to ... win the battle of the day. The Fed is in the credit business, with a newly announced CP program (not just backstops, mind you, but full-frontal lending to the corporate sector).
Now, all we need is Bush to come out and encourage everyone to ... keep spending :-)
Still, the questions about asset quality will linger. The fears over the depth of the upcoming slowdown ... can grip again, at any time.
Very strong forces are poised on either side, which is why the price-of-risk is so high, priced to heaven or hell, if you will.
Pitfalls of One Dimensional Analysis
Quality of earnings:
Consider Lehman Brothers and other firms that increased their profits quite dramatically until last year through investments in mortgage-backed and similar assets. Their profit growth was dramatic, as was their stock price performance, almost doubling from $44 at the start of 2005 to around $80 in June of 2007. However, if one considers the growth in the amount of assets on their balance sheet, the trend in profitability is much more modest.
Second, one ignores the quality of assets on the balance sheet. If one had paid attention to the rising profits from these risky investments with one eye on the balance sheet, one might have had a better appreciation for the nature of the risk involved. Of course, regulators made this worse by allowing firms to place many of their assets (such as Variable Interest Entities (VIEs), which are at the heart of the subprime mess) off the balance sheets. When people ignore what's on the balance sheet, what are the odds that they're reading the footnotes to see what's left off it?
Second, one ignores the quality of assets on the balance sheet. If one had paid attention to the rising profits from these risky investments with one eye on the balance sheet, one might have had a better appreciation for the nature of the risk involved. Of course, regulators made this worse by allowing firms to place many of their assets (such as Variable Interest Entities (VIEs), which are at the heart of the subprime mess) off the balance sheets. When people ignore what's on the balance sheet, what are the odds that they're reading the footnotes to see what's left off it?
Balance sheet analysis is so ... messy and difficult. It really is.
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