The Sky Is NOT Falling Just Really, Really Cloudy And Nervous

As of this finishing of this article the Dow Jones is closed at 504 or 4.4% down. Most of you don’t remember the day in the 80’s when it dropped 600+ points in an afternoon based on an index of 3,000 or less. We survived and prospered thereafter. This sounds like a huge drop but is a relatively minor dip if taken in historical perspective. Unfortunately Barrack Obama is saying it’s the worst crisis since The Depression. [Bullshit.]

Both Obama’s and McCain’s comments are covered at the end of this article. Among other bad news today for his campaign, McCain, in light of todays’s news, again touted that the underlying fundementals of the economy as being strong.

[This is a long article but it is based on facts not speculation or commentary.]

Just to entice you read this entire article to get the full picture of the situation, and not just the headlines in the press, here’s what is covered:

  • A 250-400 point drop on the nearly 12,000 Dow index is a minor percentage. Even at 367, just before a drop at closing, it’s 3.22 %.
  • Europe’s Central Banks have in stepped to provide liquidity to all markets.
  • The Asian Exchanges have fallen less than 5%, meaning 95% of their index stocks are operating just fine. Japan, South Korea and Hong Kong were closed today for a holiday.
  • Bond prices soared, relatively speaking, as investors fled to the security of the US backed Treasurey bond. The 10 year bond is trading, at this writing, at 3.48% which is great news for the US real estate market. The 10 US Treasury bond is the bellweather for the mortgage markets. The 30 fixed rate mortgage is currently at 6.45 with zero points and less than 6% if 1-2 points are figured into the transaction. [Disclosure: I have 27 years real estate experience. I’ve seen four of these shake-ups.]
  • Why the so-called crisis of Bear Stearns, which started the fear on Wall Street, was untrue on it’s face.
  • Why this day, and the bankruptcy filing of Lehman Bro’s may spell the end to the worst of the speculators.
  • Why, in May, was this day was predicted and forseen by many as reported in the International Herald Tribune recapping a speech in May by David Einhorn, a hedge fund manager making his case against Lehman Bro’s.
  • Candidates Obama and McCain comments at the end of the article based on Bloomberg news reports.

Now for actual data from AP this morning. The Dow Jones portion of the situation changed through out the day: “The Dow Jones industrial average fell 250 points – a number that has become almost commonplace over the past year amid the ongoing troubles in the financial sector – possibly because investors were relieved by the Merrill Lynch takoever. Bond prices soared as investors sought the safety of government debt.”

Of course this was buried deep in the story. This news of the foreign credit markets stepping in to shore up the system also not making the headlines.

Europe’s major central banks also moved quickly to calm markets, pumping billions of euros and pounds into the financial system to shore up confidence.

The European Central Bank said it received 51 bids for 90.3 billion euros ($127 billion) on its one-day tender of 30 billion euros ($42.6 billion) with a bid rate of 4.25 percent, a clear sign that demand for cash is over the top.

Similarly, the Bank of England in London offered 5 billion pounds (nearly $9 billion) in a three-day auction that drew bids for 24.1 billion ($43 billion), or nearly five times the amount that was offered.

The Zurich-based Swiss National Bank said it was also providing liquidity in “a generous and flexible manner” at an overnight rate of 1.9 percent, but wouldn’t say how much was on offer.

Still, the FTSE-100 share index was down 4.07 percent in London, the Paris CAC-40 was off 4.5 percent and Germany’s DAX 30 index of blue chips sagged 3.23 percent. India’s Sensex tumbled 3.4 percent, Taiwan’s benchmark index plummeted 4.1 percent and Singapore dropped 3.2 percent.

Deep, deep into the AP story, updated 55 minutes ago, is a quote from Stephen Pope, Chief Global Market analyst in London.

The $50 billion deal may stop speculators whose next target after Lehman would have been Merrill, according to Stephen Pope, chief global market strategist at Cantor Fitzgerald Europe in London.

The moves will create a “firebreak in the financial structure,” and once disappointment that Lehman didn’t manage to make a deal has been digested, stocks will start to recover, he said.

“You are going to have a torrid day today, probably tomorrow as well, but then I think people are going to start thinking there’s some opportunity out there to be engaged,” he said.

Why are speculators a suspicious component of the current mess? To get that possible answer you have to understand the depth of deregulation in the financial futures markets and the speculative short selling, that when done in illegal collusion with a group of very large investors, can topple a giant.

This analysis by Brian Burrough, titled “The Bringing Down Of Bear Stearns” has all the earmarks, no pun intended, of just such a collusion. Published in Vanity Fair, a magazine with the best writing and some of the best reporting on the market, is a long article, filled with personal interviews and will inform you of a reality that is little reported. Based on the next report in the International Herald Tribune perhaps we are seeing the same thing happen again.

From the International Tribune we see the whistle being blown, if someone had read between the lines, of an attack on Lehman Bro’s deserved or not. Any stats can be made to say anything. The fact that a hedge fund manager of billions of dollars was advocating an attack should have sounded an alarm.

NEW YORK: In May, David Einhorn, an outspoken hedge fund manager, took the microphone at a large industry gathering and laid out his case against the investment bank Lehman Brothers.

The firm, he told the crowd, had used “accounting ingenuity” to avoid large write-downs and remained tainted by bad commercial real estate investments. Einhorn stood to profit by convincing people of his view: He had been betting against Lehman’s stock, which stood at around $40 when he spoke, since July 2007.

In the four months that followed, the tactic known as short-selling, in which an investor bets on a decline in a stock price, played a role in hastening a fire sale of Lehman’s shares – an erosion that ultimately helped bring the venerable 158-year old firm to its knees.

At emergency meetings led over the weekend by Timothy Geithner, the president of the Federal Reserve Bank of New York, and Treasury Secretary Henry Paulson Jr., the heads of major financial institutions said they feared short-sellers would now capitalize on the climate of fear surrounding Lehman and target other financial firms. They raised the idea of having the Securities and Exchange Commission reinstate a temporary rule to limit short-selling, according to two people who were briefed on, but did not attend, the meetings.

Short-sellers have started to fix their gaze on Merrill Lynch, which is exposed to Lehman and has been one of the biggest losers in the credit crisis

Short-selling against financial institutions has proven particularly lucrative for hedge funds, even as it leaves a wreckage of crushed stock prices and crippled financial institutions in its wake. Einhorn has presumably turned a big profit on Lehman’s demise.

Einhorn began shorting Lehman’s stock when it cost around $70 a share. To short the stock, Einhorn borrowed shares, sold them and put the cash aside. His obligation was to buy new shares at a later date, when he hoped the price would be lower. He got his wish: Lehman’s stock crossed below $20 in early August and crossed below $10 last week.

Notice the action of fixating on Merrill-Lynch which, in what may have been an unnecessary crisis mode without the short-selling and resulting liquidity problem, is being absorbed by Bank of America for $50 billion.

If Merrill-Lynch was worthless why did Bank of America pay $50 billion? Because Merrill-Lynch, hit hard by the current real estate problems, also faced a liquidity crisis based on the falling price of their stock, created by short sellers and the rumors on Wall Street of liquidity problems, need a big brother to calm all those fears and buy their assets at fire sale prices. Remember the story above of Bear Stearns. Read it if you haven’t yet.

Here’s the opening lines from the VF article:

On Monday, March 10, the rumor started: Bear Stearns was having liquidity problems. In fact, the maverick investment bank had around $18 billion in cash reserves. But soon the speculation created its own reality, and the race was on to keep Bear’s crisis from ravaging Wall Street.

Both Barack Obama and John McCain reached out to blame deregulation. Obama blamed, specifically, the leadership of George Bush. John McCain called for better supervision, and presumably more regulation, of Wall Street.

Sept. 15 (Bloomberg) — Presidential candidates Barack Obama and John McCain called for stricter regulations as financial woes deepened on Wall Street, while their campaigns exchanged political volleys over the crisis.

Obama, the Democratic nominee, said President George W. Bush‘s policies have caused “the most serious financial crisis since the Great Depression.” He also called for “modernizing” regulations at a rally in Grand Junction, Colorado.

McCain, the Republican nominee, vowed to “clean up Wall Street” and “replace the outdated, patchwork quilt of regulatory oversight” at an event in Jacksonville, Florida. “We will never put America in this position again,” he said.

Both candidates were trying to score points with voters looking for reassurance after Lehman Brothers Holdings Inc. became the latest casualty on Wall Street. Barclays Plc and Bank of America Corp. abandoned takeover talks yesterday, forcing Lehman Brothers, the fourth-largest U.S. investment bank, into the biggest bankruptcy filing in history.

“People need to have confidence that the candidates for president have some solutions for the way out of this mess,” said Democratic consultant Peter Fenn. He said both McCain and Obama will have to provide details on how they would avert any further meltdown in the markets.

Here’s more details of the Obama-Biden attack on Bush-McCain. More on that specific topic later tonight.

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3 Responses to The Sky Is NOT Falling Just Really, Really Cloudy And Nervous

  1. I’d like to point out – that in general, this was one of the worst days economically – probably worst than back in 1986 – not because of the DOW drop, but because of the confluence of events – Allen Greenspan saying this was the worst in his lifetime (economic Godfather), the biggest bankruptcy in US history, other financial failures rumored, and a buyout of Freddie and Fannie. All at once . So yes, this is the worst the economy has been. What’s keeping it feeling worst is the way we’ve gotten here…easy cheap credit ( the 80s had huge interest rates), and fairly low unemployment (people are employed, just in lower paying jobs.)

  2. Darrell Prows says:

    Don’t forget Washington Mutual. When I checked a few minutes ago its stock was below $2.

  3. “So yes, this is the worst the economy has been. What’s keeping it feeling worst is the way we’ve gotten here…easy cheap credit ( the 80s had huge interest rates), and fairly low unemployment (people are employed, just in lower paying jobs.)”

    Greenspan was not an adult or participant in 1929. In his lifetime of adult service he is correct. We have more institutions tittering than ever. It is not unpresented. I have a feeling you did not, as most don’t, read all of the links and long stories attached to my piece. Deep bandini yes. end of the world no.

    Darryl: If you have $$ it’s a great time to buy. WaMu is an institution that has fallen victim again to the short sellers and rumormongers, while having real problems of it’s own. You can bet Warren didn’t sell it short. He bought it long based on fundamentals. Great move. Everyone with money for RE or stock should be buying with both hands. Might wait for the RE a little longer not much. Sub-six interest rates will bring out the buyers.