Stocks and investing thread

[NorthSideSox72]

So, CK, in your opinion...what happens if the Fed reserves run out before we run out of crappy securities that banks don't want?

I know this was directed at Chuck, but, I wanted to add a response.

 

This is a game of hot potato. These aren't equity securities, they are debt securities. The ability of the debtor to make payments is everything. So for those holding the actual instrument, if the government doesn't assist and no one is willing to buy it at or near par, then its simply a matter of what happens to the holder. In this way, a lot of banks could be stuck with massive devaluations, as they try desperately to sell the bad debt at fractional prices. And if they can't regen enough cash from those transactions (those that even CAN be sold), then they could very well go under. Any many probably will.

 

Adding complications are agreements like swaps, where these holders of risky debt "sold" the risk to 3rd parties. Problem is, most of the protection sellers themselves don't have nearly the capital to cover, so in addition to institutional businesses like IB's, many hedge funds and other risk buyers will also go under, as they are deluged by lawsuits and notional calls that they cannot meet. They go bankrupt, shrug their shoulders, and walk away. So, that all circles back again to the IB's.

 

Those banks are in for a world of hurt.

 

[Cknolls]

So, CK, in your opinion...what happens if the Fed reserves run out before we run out of crappy securities that banks don't want?

 

Fed will print more money.

[NorthSideSox72]

Fed will print more money.

Further deflate the dollar? I somehow doubt they will do much of that, unless they were really in deep s***. Its already severely deflated, and signals have recently been that they are leaning back towards a stronger dollar policy. Plus, I think they'd rather have some banks and funds get their cages rattled, than do that.

 

[kapkomet]

Further deflate the dollar? I somehow doubt they will do much of that, unless they were really in deep s***. Its already severely deflated, and signals have recently been that they are leaning back towards a stronger dollar policy. Plus, I think they'd rather have some banks and funds get their cages rattled, than do that.

I think they've allowed the dollar to go as low as it's going to go. They have to pump back up the value of it, at least somewhat. So no, they won't print more money. Some of the small fish banks would have to fail first.

[Cknolls]

In response to Balta, if the Fed used up their entire balance sheet on garbage collateral, the last resort would be to print. The Fed cannot go bankrupt, but they can print print print. And yes it kills the dollar, but didn't they say they couldn't allow Bear to fail? What happens next time if its LEH, or Citi?

These companies will be shells of themselves when this passes. I for one cannot wait to see what LEH reports for earnings next week. I still believe they are hiding some bodies that are starting to stink. The spreads on their CDS widened considerably over the past week. And I still believe the bailout of BEAR STEARNS was actually a bailout of JPM; that is why BEAR was to big to fail IMO. JPM was counter-party to a boatload of BEAR trades.

[NorthSideSox72]

In response to Balta, if the Fed used up their entire balance sheet on garbage collateral, the last resort would be to print. The Fed cannot go bankrupt, but they can print print print. And yes it kills the dollar, but didn't they say they couldn't allow Bear to fail? What happens next time if its LEH, or Citi?

These companies will be shells of themselves when this passes. I for one cannot wait to see what LEH reports for earnings next week. I still believe they are hiding some bodies that are starting to stink. The spreads on their CDS widened considerably over the past week. And I still believe the bailout of BEAR STEARNS was actually a bailout of JPM; that is why BEAR was to big to fail IMO. JPM was counter-party to a boatload of BEAR trades.

You're still not allowing for what I think is the most likely possibility - to LET some banks and funds fail, or at least to make them soak in some of that bad debt themselves. The loss of money will be primarily in devaluations that will occur over time for the holders of these debts and swaps.

 

[Balta1701]

You're still not allowing for what I think is the most likely possibility - to LET some banks and funds fail, or at least to make them soak in some of that bad debt themselves. The loss of money will be primarily in devaluations that will occur over time for the holders of these debts and swaps.

I simply can't imagine what it would be like for the country if there was an actual failure and run on a major bank, let's say, Citibank, for example. Where millions of people are actually making use of the FDIC in order to get some chunk back of their balances, where suddenly because the company is no longer operating people have no means to make use of their active credit streams, etc. What would a run on a major bank like Citigroup actually be like? (Just for reference, I just cashed in a gigantic boatload of my reward points from my Citibank credit card...just because I've been worrying about this for about 6 months)

[NorthSideSox72]

I simply can't imagine what it would be like for the country if there was an actual failure and run on a major bank, let's say, Citibank, for example. Where millions of people are actually making use of the FDIC in order to get some chunk back of their balances, where suddenly because the company is no longer operating people have no means to make use of their active credit streams, etc. What would a run on a major bank like Citigroup actually be like? (Just for reference, I just cashed in a gigantic boatload of my reward points from my Citibank credit card...just because I've been worrying about this for about 6 months)

I am not talking about true failure of a major bank here. I am talking about a few banks and a lot of small fish investment players taking big hits. No big banks are going to actually go under - I was not suggesting that, sorry if I gave that impression. What will go under is the profits of those banks, and for the smaller players, some of them may in fact go under. But many of those will be acquired or auctioned or whatever. Some individual investors are going to take a bath. And I think all that will happen before the Fed makes any major move to print more money.

 

[southsider2k5]

http://online.wsj.com/article/SB121245031496539649.html

 

Commodity-Price Scapegoats

By DONALD L. LUSKIN

June 3, 2008

 

In the political quest to place blame for high food and energy prices, a new scapegoat has been found: commodity index funds. Politicians of both parties, energy company executives and farm lobbying organizations all agree these funds should be regulated or prohibited altogether. Who says this is an age of political discord?

 

The Commodities Futures Trading Commission, charged with overseeing these markets, has said there is no rigorous evidence commodity index funds have any particular effect on commodity prices – and plenty of reasons to think that they don't. Nevertheless, it was reported over the weekend that the CFTC will likely bow to political pressure, and soon announce initiatives to crack down.

 

Commodity index funds are especially vulnerable politically. They are a big target – reportedly, there is about $260 billion invested in them currently. Among their largest investors are retirement funds for government employees and teachers, which by their very nature are subject to political pressure. For example, the organized labor lobby is already trying to get states to make their funds to stop investing in private equity deals in companies that won't employ union labor.

 

These and other investors in commodity index funds hold them for the same reason that they – and probably you, too – hold plain-vanilla stock index funds. In both cases, they're a simple, low-risk and low-cost way to get broad and diversified exposure to a major asset class.

 

Commodity index funds do what index managers like Vanguard have done for decades with stocks – invest passively in a portfolio designed to track a published benchmark index. For stocks, it's generally the S&P 500. For commodities, the most popular is the Goldman Sachs Commodities Index (GSCI).

 

The evidence against the index funds is circumstantial at best: Commodity prices have soared over the same recent period that commodity index funds have rapidly grown. So the index funds must have caused it.

 

But coincidence isn't causation. And such causation that can be shown to exist actually runs the other way: Rising commodity prices cause the dollar value of commodity index funds to rise, just as rising stock prices would make a stock index fund more valuable. This accounts for nearly half the reported growth in commodity index fund assets this year. But if commodity index funds are such a powerful influence on prices, how can one explain the fact that not all the commodities in the GSCI have risen?

 

Over the last year, the agricultural, energy and precious-metals sectors in the GSCI have risen. Livestock prices, however, have been flat, and industrial metals are lower on average – with the conspicuous exception of steel. Steel is up dramatically but is not even in the index.

 

In the absence of rigorous evidence, are there theoretical reasons to expect that commodity index funds should affect prices? Yes, if only that when new buyers enter a market they can be expected to drive prices higher, all else being equal.

 

That is no crime, even though some politicians would like to portray it as such now. But of all investors, index funds should have the least power to move prices. That has always been one of the great attractions of stock index funds, and the same principle applies to commodities.

 

Why? When Warren Buffett buys an individual stock – or when T. Boone Pickens buys an individual commodity – prices will rise because the market must incorporate the possibility that these experts "know something." But index funds buy broadly diversified portfolios (whether it be stocks or commodities) because they know nothing at all. Does anyone think that the California Public Employees Retirement System has any superior knowledge about crude oil or wheat? Of course not.

 

Unlike other commodities buyers, index funds never take physical delivery of commodities to store or consume them. They are investors, not hoarders. They don't divert any supplies from the markets. When their futures contracts near expiration, they sell them and replace them with longer-dated contracts. Thus, once their positions are established, they are perpetually both buyers and sellers in equal proportion.

 

And index funds, despite their size, pose no threat of market instability. Held by heavily regulated fiduciaries, they typically don't employ the enormous leverage available to futures speculators. So when prices are volatile, index funds will be an anchor of stability.

 

With increasing demand from emerging economies, the dollar near all-time lows, and the Federal Reserve holding interest rates below the rate of inflation, surely we can come up with better explanations for high commodity prices than the growth of commodity index funds. Sadly, those better explanations are more difficult to swallow politically.

 

Mr. Luskin is chief investment officer of Trend Macrolytics LLC.

[southsider2k5]

ONE of the reason's being given for today's sell off is Obama clinching the nomination is scaring the markets... I found that interesting.

[Balta1701]

"Right now what we're seeing is the US consumer losing their disposable income as they have to spend more and more on necessities because of higher prices for gas and food," says Ron Ianieri, a market strategist and co-founder of the Options University investor education center. "Normally when you have a certain budget and you can't keep up with the budget one of the easy steps is to extend that budget using credit."

 

One of the main problems with that is US consumers—and their counterparts in Europe as well—already are delinquent on their credit card payments in numbers not seen in six years. The Federal Reserve last week said credit card delinquencies hit 4.86 percent in the first quarter in 2008, while revolving debt—or the type used in credit purchases—hit $957.2 billion in March, a 7.9 percent increase.

 

As all that risky, high-interest debt keeps accumulating, consumers will find themselves deeper in a hole that threatens to keep the economy in its sluggish state. Economists worry that the problems are being exacerbated by consumers using credit not only to buy big-screen TVs and patio furniture, but also to pay their mortgages and shop for groceries.

 

"There's a significant risk to people who are using credit cards to help them try to bridge the gaps that they're facing," says Sean Snaith, director of the University of Central Florida's Institute for Economic Competitiveness. "The reality is the economic picture isn't going to clear up instantaneously."

 

Meanwhile, the banks that underwrite the credit card debt stand to lose as the delinquencies continue to rise. Standard & Poor's on Monday issued a dour forecast for banks in 2008, in part because of their exposure to bad debt.

 

Ianieri ranks his "starting five" in terms of exposure to risky debt: Lehman Brothers, Citigroup, Bank of America, UBS, and Merrill Lynch.

 

"It's a disaster, it's a time bomb," Ianieri says. "The credit crisis is a lot more severe than it's being made out to be. I think the government is doing everything it can to keep the severity of this situation under wraps from the general population. I think they're just trying to bide time for these banks."

CNBC.

[Cknolls]

GS rumored to be the next to take a large writedown.

[Rex Kickass]

Dumb question: why is a decline in crude oil inventories causing the price of crude to jump up? Would the decline in inventories reflect slackening demand in crude oil purchase? Especially given that there have been increases in gasoline and distillate fuel inventories?

[southsider2k5]

Dumb question: why is a decline in crude oil inventories causing the price of crude to jump up? Would the decline in inventories reflect slackening demand in crude oil purchase? Especially given that there have been increases in gasoline and distillate fuel inventories?

 

Decline in demand is usually shown by a rise in inventories.

[Rex Kickass]

OK, but there have been increases in inventories in gasoline and distillate fuels. Where is the lower inventories coming from? Is it coming from the refiners themselves - seeing slackening demand? Or is it because refining production shrank over the last month marginally? Or is it because of genuine usage increases and less supply?

[NorthSideSox72]

OK, but there have been increases in inventories in gasoline and distillate fuels. Where is the lower inventories coming from? Is it coming from the refiners themselves - seeing slackening demand? Or is it because refining production shrank over the last month marginally? Or is it because of genuine usage increases and less supply?

crude oil prices are futures contracts. As such, you are trading on an anticipated future price. A decline in inventory will result in higher prices in the future. A temporary spike in gasoline inventories may be helpful of oil follows suit, but as it doesn't (in fact they go down), then the future trend is for higher prices due to lower supply.

 

[southsider2k5]

OK, but there have been increases in inventories in gasoline and distillate fuels. Where is the lower inventories coming from? Is it coming from the refiners themselves - seeing slackening demand? Or is it because refining production shrank over the last month marginally? Or is it because of genuine usage increases and less supply?

 

Crude is the big number they go off of, because that is where the distillates come from. Inventories in general have been shrinking for a while now, not to mention the secondary factors like demand not slacking off as much as has been expected, especially in the far east.

[southsider2k5]

OK, but there have been increases in inventories in gasoline and distillate fuels. Where is the lower inventories coming from? Is it coming from the refiners themselves - seeing slackening demand? Or is it because refining production shrank over the last month marginally? Or is it because of genuine usage increases and less supply?

 

Crude is the big number they go off of, because that is where the distillates come from. Inventories in general have been shrinking for a while now, not to mention the secondary factors like demand not slacking off as much as has been expected, especially in the far east.

[Cknolls]

A few days ago there were 67 preferred securities trading with 9+% yields. Three days later? The number is 101. KeyCorp is trading north of 13%. Fasten your seatbelts!

[Balta1701]

A few days ago there were 67 preferred securities trading with 9+% yields. Three days later? The number is 101. KeyCorp is trading north of 13%. Fasten your seatbelts!

Gesundheit.

[NorthSideSox72]

Anyone else getting annoyed about pouring money into their 401k's and seeing the value still drop? This has been a rough year.

 

I feel like Dorothy in the Wizard of Oz...

 

Its just a buying opportunity... its just a buying opportunity... its just a buying opportunity

[Rex Kickass]

Anyone else getting annoyed about pouring money into their 401k's and seeing the value still drop? This has been a rough year.

 

I feel like Dorothy in the Wizard of Oz...

 

Its just a buying opportunity... its just a buying opportunity... its just a buying opportunity

 

I feel the same way.

[Balta1701]

So I see the Dow appears to be closing below 11000 today?

[NorthSideSox72]

So I see the Dow appears to be closing below 11000 today?

Yes.

 

Buy.

 

Buy now.

 

[Balta1701]

Buy now.

If you're looking purely long term I'd agree on that. Long term in the 20-30 year window. But for the next several years, I think things are going to get a lot worse before they get better.