34 replies to this topic

[GameOfLove]

Bear Stearns sold itself to JP Morgan Chase. The price tag you might ask? $2 a share. :shocked: :shocked:


http://www.nytimes.com/2008/03/16/business...amp;oref=slogin

[GameOfLove]

All this scare last night and this morning...

The DOW is up by 30 points.

Typical media scaring the public out.

[icehater]

GameOfLove, on Mar 17 2008, 03:04 PM, said:

All this scare last night and this morning...

The DOW is up by 30 points.

Typical media scaring the public out.

I have a feeling the Dow is about ready to jump 800-1,000 points in the near future. Much of what is going on is tied to a run on the bank (remember "It's a Wonderful Life") and not to underlying fundamentals which are actually pretty strong and not even remotely close to the fear that has gripped the market. Whenever momemtum starts to be the driver instead of fundamentals then you are bound to have very major corrections in a very short period. Then those corrections get blown up even more by panic short covering. Right now you have pure momemtum causing a weakening dollar, higher oil and gold (the weakening dollar is actually the biggest cause of higher oil as oil is priced worldwide in dollars) as folks sell stocks at low points to get into those commodities at record high prices. That can't last much longer and the correction will be huge when it happens. You could easily see a 500 point movement up in the Dow in one day, with a +100-125 on Nasdaq and a +40-60 on the S&P and it may happen this week. Just my feeling.

I learned a long time ago to not bet against the Fed and a lot of people are ignoring the liquidity being pumped into the market right now and it's like novacaine as it's going right to the wound. On top of that the wound is really a psychological wound and not a real one. As an example of what I mean is Bear Sterns selling at 2 cents on the dollar. Absurd and what a fantastic deal for JP Morgan/Chase. For Bear to lose 98% of it's value in reality (vs the market perception and run on the bank that got it there) would mean that the homes it wrote it's mortgages on are worth 2% of what the folks paid originally. Anyone think you can buy even of those homes at 2% of their costs. Well JP Morgan just bought them all at that value and will write back to earnings what the homes are really worth vs that 2% when this fear eases. The liquidity is all there, it's just fear that has hit the market and the epicenter of the earthquake is right under Bear Sterns building. By the way Bear's building is wholly owned by them and it alone is worth 5x what JP Morgan paid for the stock. When you see things like that happen then you know the market has lost its senses.

[icehater]

GameOfLove, on Mar 17 2008, 03:04 PM, said:

All this scare last night and this morning...

The DOW is up by 30 points.

Typical media scaring the public out.

By the way it was a very bleak day. The Dow was not indicative of the market at all. Remenber that it's just a composite of 30 very large companies and it's not even properly weighted to the values of those companies. The S&P, representing 500 larger companies is statistically weighted properly to the size of its companies and is really the measure people look to for large cap stocks and the Russell, representing 2,000 companies is what folks look to for the broader heath of the overall market on any given day. The market as a whole was down 2-4% today and coming on top of big losses on Friday it was basically as bleak as expected but camougflaged by the Dow.

[devilsfan0405]

Ice, with all this money being pumped into the economy through the Fed rate cuts, loans and the economic stimulus package, are you concerned about inflation running out of control? The infusion should help the economy in the 2nd half of the year, but will it be a double-edged sword?

[icehater]

devilsfan0405, on Mar 18 2008, 08:56 AM, said:

Ice, with all this money being pumped into the economy through the Fed rate cuts, loans and the economic stimulus package, are you concerned about inflation running out of control? The infusion should help the economy in the 2nd half of the year, but will it be a double-edged sword?

Depends on what you mean by inflation. I don't consider 3-3.5% inflation and I've long thought the Fed's benchmark of 2% is too low. While we had low inflation numbers all these years, many folks would say inflation was actually high because the cost to buy a home was soaring. But that cost was also partly compromised by low ARM's. People weren't buying a house , they were buying a 3-5 year mortgage payment and figuring out what to do with that mortgage at the end of the ARM period. Speculators didn't care as they would have sold the house long before the ARM period was up. So now we go the other way with somewhat higher inflation that doesn't measure the cost of rapidly falling home prices. It's a cycle. The Fed has to have an index that adjusts day to day inflation with pricing that is happening in housing.

The Fed's liquidity is actually just a bandaid. It's there to back financial markets and replace liquidity that is frozen in the private sector. Right now the private money of investors is is being put under the mattresses. The moment that private money starts flowing again the Fed will pull back the liquidity. That's why the program put in place last week was a bandaid with a 28 day window. It's not LT but the FEd will extend it until investors come back in. As they do the Fed pulls out. Interest rates were kept too high for too long a time, partly to support the dollar and partly to help control housing prices by raising ARM's. As I noted earlier the lower the rates are in ARM's the more speculation you get in the housing market. The Fed can't control LT rates but it does control short-term rates so keeping short-term rates higher slowed housing prices as it eliminated speculation and highly marginalized buyers. That's partly what has caused housing prices to fall and the speculation coming out of that bubble is what made it collapse. So now we have oil and gold and other commodities partially getting inflated with the bubble that had been in housing. The money doesn't disappear, it just flows to the area it thinks has the greatest growth and ends up overpricing that area, in some cases seriously overpricing it. The real fundamental price for oil is much lower than the market price with speculation and a terrorist premium making up the difference.

What you need to keep in mind is that Europe was showing no sign of cutting rates and Japan's rates were at 0 and couldn't be cut. So the FED also kept rates up to support the dollar. It gave that up because of the developing liquidity crunch. Europe will have to ease at some point otherwise you may stop seeing Mercedes Benz and BMW's and other European goods around here. Those businesses must be getting killed in the US right now. Imagine the leasing problem of cars being returned from a few years ago that had residuals that were priced at 1.25 Euro's to a dollar and now you deal with a Euro of 1.57. If you had a car that had a residual that was $25,000 and you bought it with the Euro at 1.25 than MB or BMW was expecting to buy that car back in US dollars of $31,250. At 1.57 that car has to be bought back at $39,250. For them to make money they have to almost sell the car 3 years later at the price they originally sold it for. That's impossible because you'd lease a new one instead. So they need to balance out US losses with exchange rate gains elsewhere.

Finally, it may be hard to believe but the Nikkei once traded at 40,000. It was mainly driven by an unprecedented real estate boom in Japan. Today the Nikkei trades in a range at 30-50% of that all time high. The Fed will never let that happen to the Dow or S&P so it will flood the market with liquidity to prevent what happened in Japan from ever happening here and deal with inflation after it corrects the problem it has on its hands. Three montsh ago I was no fan of Bernanke as I thought his hawkish ways would never let him act. Today i have tremendous respect for him.

So here's the goldilocks picture the Fed is trying to get the boat to:

1. Liquidity returns and buyers come back in as loans get more attainable
2. For awhile interest rates are low and support this.
3. New controls are put in place by lenders to limit speculation and over-marginalized buyers so that the rebound is a controlled normalized one rather than an all at once one.
4. The dollar starts to re-strengthen when Europe starts it's long overdue rate cuts. The US may even start raising rates while the Euroeans are cutting leading to a rapid dollar srengthening
5. A strengthening dollar eases oil and once that happens, it's price and other commodities start to fall (which is an ease on inflation). If it happens fast enough shorts run for cover and you can get a 20-30% correction in a hurry.
6. As monies come out of commodities it flows to the stock markets and they soar. The US market has the most to gain initially causing more dollars to be bought which even further strengtens the dollar and weakens commodity prices.

Why is all this possible? Because if you eliminate the housing sector the US economy grew at a very healthy 3-4% last year. So if you get housing flat rather than falling you actually have a strong economy. Get housing positive and you have a much stronger economy. But if it ever got too strong than you can set yourself back up for the type of problems we are going through now at some future date.

[lab94]

Great write up. Sounds Like its not that different then the late 90's when evryone was buying internet stocks, then when that crashed everyone kept their money out for a while.

[icehater]

lab94, on Mar 18 2008, 10:05 AM, said:

Great write up. Sounds Like its not that different then the late 90's when evryone was buying internet stocks, then when that crashed everyone kept their money out for a while.

Lab, Financial markets work almost identically as a global weather pattern. The whole thing is a domino effect and is very repetitive. The trick is to not let anything get out of hand the way Japan did in the 80's. That has led to a very long-term problem in their stock market.

[Mike_The_Golfer]

lab94, on Mar 18 2008, 10:05 AM, said:

Great write up. Sounds Like its not that different then the late 90's when evryone was buying internet stocks, then when that crashed everyone kept their money out for a while.

It's the same as it was in the late 90s with tech stocks, a few years back with real estate and currently with oil and other commodities....you just don't have the fundamentals to support these ridiculous gains and eventually, people have to start paying the piper.

[devilsfan0405]

Mike_The_Golfer, on Mar 18 2008, 10:53 AM, said:

It's the same as it was in the late 90s with tech stocks, a few years back with real estate and currently with oil and other commodities....you just don't have the fundamentals to support these ridiculous gains and eventually, people have to start paying the piper.

No kidding...remember when Yahoo! was $300 a share and analysts were claiming it was still undervalued? Crazy.

[vascudave]

devilsfan0405, on Mar 18 2008, 10:25 AM, said:

No kidding...remember when Yahoo! was $300 a share and analysts were claiming it was still undervalued? Crazy.

i do, i have 400 shares :frantics:

[satellite_eyes]

Bottom line for anyone in the real world

*Eliminate bad debt (credit cards, car loans, etc)
*Save money (savings acct, money mkt, CDs, etc)

You should always have several months (at least) of cash readily available to fall back on.

*You can invest with any excess from there. But don't bank on a 10% return every year. It's unrealistic despite what any money manager might tell you.

*Keep in mind you should always be taking advantage of any retirement plans, especially those that come at a tax savings (IRAs, PESPs, etc).

If someone is unable to do the first two (above) then they are living beyond their means.

[devilsfan0405]

satellite_eyes, on Mar 18 2008, 11:35 AM, said:

Bottom line for anyone in the real world

*Eliminate bad debt (credit cards, car loans, etc)
*Save money (savings acct, money mkt, CDs, etc)

You should always have several months (at least) of cash readily available to fall back on.

*You can invest with any excess from there. But don't bank on a 10% return every year. It's unrealistic despite what any money manager might tell you.

*Keep in mind you should always be taking advantage of any retirement plans, especially those that come at a tax savings (IRAs, PESPs, etc).

If someone is unable to do the first two (above) then they are living beyond their means.

Solid, practical advice.

I'm glad that I started to save early. I'm 25 and I took part in my company's 401k plan as soon as I became eligible and I was saving on my own before then. I've got a few bad money habits that I'm working on, but overall, I'm happy with what I've done so far.

The great part about your 401k is that putting away money for it is painless. It just comes out of your paycheck automatically every week. I don't even notice that my take-home pay is a bit smaller.

[Mike_The_Golfer]

Pretty much everyone these days are living beyond their means - particularly in the tri-state area - because of housing. It is unavoidable. Whether you own or rent, your monthly mortgage/rent payment will likely be a percentage of your income 3-4 times higher than what was considered the "proper" amount. There is almost no way around that.

[devilsfan0405]

Mike_The_Golfer, on Mar 18 2008, 12:09 PM, said:

Pretty much everyone these days are living beyond their means - particularly in the tri-state area - because of housing. It is unavoidable. Whether you own or rent, your monthly mortgage/rent payment will likely be a percentage of your income 3-4 times higher than what was cansidered the "proper" amount. There is almost no way around that.

I hear you. It's not easy. Don't forget about soaring property taxes. I've seriously considered moving out of the area. I like it here, but it's just so damn expensive.

[GameOfLove]

The problem is also most Americans want all the latest tech gadgets. You want a blackberry, iphone, ipods, GPS, new computers, the huge flat screen tv, blu-ray player etc even though it's past your budget to buy.

IMO I think should be more education at the high school and college level talking about how to maintain budget and not get caught up with peer pressure and trying to show off your friends and family what you have.

[LongIslandWthr]

Dow is up over +200 points

[devilsfan0405]

GameOfLove, on Mar 18 2008, 01:48 PM, said:

The problem is also most Americans want all the latest tech gadgets. You want a blackberry, iphone, ipods, GPS, new computers, the huge flat screen tv, blu-ray player etc even though it's past your budget to buy.

IMO I think should be more education at the high school and college level talking about how to maintain budget and not get caught up with peer pressure and trying to show off your friends and family what you have.

I agree with that. These kids have to read Shakespeare to graduate high school, but they don't have to know how to balance a checkbook. That's pathetic. Everyone needs to have at least basic knowledge of personal finance, no matter what field they go into. Aside from English or Drama majors, who's going to utilize Shakespeare in their daily lives?

[vascudave]

GameOfLove, on Mar 18 2008, 12:48 PM, said:

The problem is also most Americans want all the latest tech gadgets. You want a blackberry, iphone, ipods, GPS, new computers, the huge flat screen tv, blu-ray player etc even though it's past your budget to buy.

IMO I think should be more education at the high school and college level talking about how to maintain budget and not get caught up with peer pressure and trying to show off your friends and family what you have.

that's called proper parenting, my parents taught me, i will pass it on to my children. imo let parents be parents on some level.

[icehater]

Well I almost got it right. Dow was +420, nasdaq +91 (just missing my guesstimates from yesterday) and the S&P at +55 got in my 40-60 range. Bernanke's .75 cut today instead of a full point was brilliant IMO. I'm still looking for a 1,000 point rise in the DOW inclusive of today's move in a fairly short time. Let's hope I'm right.