Congress to the Rescue

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Posted by The Tim on October 9th, 2008 at 2:03 PM · 128 Comments

Categories: News
Tags: bailout, Dow Jones, government_meddling, Stock Market

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128 responses so far ↓

1 vboring // Oct 9, 2008 at 2:13 pm

is it time to panic yet?

the best explanation i’ve heard for this action is that various banks are deleveraging and raising cash to cover the LEH CDS positions. i’m sure some of that lingo is wrong, so check out the link:

http://bigpicture.typepad.com/comments/2008/10/lehman-cds-unwi.html#more

even a panic selloff bounces every once in a while on the way down - this movement has been straight down for 7 days in a row. it must be some kind of record.
2 zer0man // Oct 9, 2008 at 2:21 pm

correlation does not mean causation
3 nonskanse // Oct 9, 2008 at 2:22 pm

Never have I been happier to have some cash available.
I can’t decide whether I think the market is going to tank forever, or whether it’s going to go back up in a couple years.

If the first, I would very much like to keep my cash as cash. Or buy some gold.
If the second, I really really really want to get some money into the market!

So hard to decide! ^_^

So happy not to own a house!
4 Lake Hills Renter // Oct 9, 2008 at 2:40 pm

Sad thing is, if they hadn’t passed the bailout they would be blaming all this on the fact the bailout didn’t pass.
5 patient // Oct 9, 2008 at 2:44 pm

At this point I’m happy that the bailout package passed. Not because I think it’s any good but can you imagine the traction the bailout pushers would have today if the package would have been rejected? They would have blamed the crash squarely at the rejected package and been able to push through any crazy new package of their choice.
6 The Tim // Oct 9, 2008 at 2:46 pm

patient @ 5,

Yeah, I was actually thinking the same thing just now.
7 patient // Oct 9, 2008 at 2:46 pm

Sorry LHR for copying your comment, it wasn’t there/refreshed when I posted mine.
8 Jen // Oct 9, 2008 at 2:54 pm

Honest question: are regular posters on here **happy** about this?

Fairly often there seems to be “Woo-hoo! This is sure to drive down housing prices!!” posts about the global market collapse. Will the savings on the house you buy (assuming you still have a job) make up for your depleted investments? Or does everyone have cash tucked under their mattress?

We’re so interconnected. This recession/depression isn’t just going to hurt those who were irresponsible. You won’t be rewarded with a great standard of living and a cheap house.

What am I missing?
9 The Tim // Oct 9, 2008 at 3:00 pm

Jen,

I only speak for myself, but my primary emotion is disgust.

I’m disgusted that the economic pyramid scheme was allowed to get this big despite repeated warnings from numerous intelligent, well-placed economists over the last five years.

I’m disgusted that the so-called “rescue” packages are still failing to address the core underlying issues that caused the mess, and instead are aimed at propping up the fundamentally unsound house of cards by any means necessary, which will almost certainly only serve to prolong the pain.

I’m disgusted that a totally preventable problem has become a global disaster, thanks to greed.
10 Mike2 // Oct 9, 2008 at 3:02 pm

We’re so interconnected. This recession/depression isn’t just going to hurt those who were irresponsible. You won’t be rewarded with a great standard of living and a cheap house.

What am I missing?

What you’re missing is that we hit the point of no return several years ago, and that’s what made the housing bubble all that much more ridiculous. I don’t see anyone that is happy with the current situation, though there are a lot of people here that feel vindicated in having recognized it for what it was.

I for one am pretty nervous because while I saw what was happening with housing, I didn’t believe until recently that people overpaying for houses would be the catalyst for a global credit market crash.
11 buyStocks // Oct 9, 2008 at 3:11 pm

nonskanse,
As my name suggest, I’m gonna continue to buy stocks (for long-term) as the Dow goes into the ground.
12 cheapseats // Oct 9, 2008 at 3:12 pm

Jen,

Happy no, it is scary, but honestly this site, and the doom and gloomers, have helped me make better decisions over the past year.
Am I happy that America is hopefully understanding this reality check? Yes.
Is it hurting me personally as well? Yes.
Am I happy because I think that this will bring housing prices down for me personally? That would be great, but I am not sure there is a price that I would buy at that I will see in Seattle any time soon.
13 Olaf // Oct 9, 2008 at 3:13 pm

If you’re watching the Dow Jones Industrial average, you’ve missed the point of the bailout/rescue. The Dow is a lagging indicator, it’s utterly meaningless as a measure of the real crisis: the freeze-up of world credit. The bailout is designed to bring down the cost of inter-bank borrowing and commercial paper, so companies can keep borrowing the money they need to meet payroll, etc. You should be charting the LIBOR, or the yield on a 3-month Treasury bond, to get a sense of whether the bailout is working.
This is the best explanation out there: http://www.npr.org/blogs/money/2008/10/hear_were_on_thin_ice.html

If the bailout works, the Dow will respond… next spring.
14 patient // Oct 9, 2008 at 3:17 pm

Am I happy that home prices are coming down, yes.
Am I happy that greed and lies created a gigantic housing bubble that now causes the stock market to crash, no.

Will I gain more from buying a house at a reasonable price than what I will loose in investments during the crash, I’m positively sure this will be a YES ( If I can keep my job ).
15 vboring // Oct 9, 2008 at 3:19 pm

I’m happy to see that people are starting to at least think about living within their means.

Oprah had two episode this week about how to make a budget and stick to it - it doesn’t get much more mainstream than that.

I hope that personal credit crunches down to a point where people can only buy things that they can actually afford. It will be better for all of us in the long run.
16 David McManus // Oct 9, 2008 at 3:22 pm

“I hope that personal credit crunches down to a point where people can only buy things that they can actually afford”

Congress will never let that happen. How dare anyone interfere with my God given right to purchase a big azz home, 2 cars, mochas on demand, designer clothes, etc……
17 tlw // Oct 9, 2008 at 3:37 pm

The Tim,

I’m curious: are you profiting from this collapse? This is besides Ads and sponsorship (I know that is your biz). I mean if you believe E, syn, and KD have been so right for so long, you should have positioned yourself accordingly. I’m sure E or syn would be more willing to give you some tips.
18 The Tim // Oct 9, 2008 at 3:39 pm

tlw,

I haven’t been in the game as long as I should have, but yes, I do have some positions that are profiting me with the continued downturn.
19 b // Oct 9, 2008 at 3:42 pm

Olaf -

Considering the TED spread hit an all-time high today, and has been going up since the bailout passed, shows that the bailout potential has not worked (yet?). Why do you think Paulson is now talking about direct nationalization? They were hoping passing the bailout with a wink that it would back-door recapitalize banks was going to be enough to calm the markets. It didn’t, neither in equities or interbank lending.
20 mukoh // Oct 9, 2008 at 3:42 pm

I am sure if me or Tim were behind this pyramid and having made billions on it, would not be discusted, but very disconnected on a private island.

Looking at the latest drop I am loving it. More buys on KMP to yield 9.2% dividends in the long run.
21 softwarengineer // Oct 9, 2008 at 3:49 pm

WHERE WERE OUR PRESIDENTIAL CANDIDATES’ DEBATE ON THE STOCK MELTDOWN?

Both of the “that ones” were too busy throwing mud at each other in a lame controlled manner. They should have been horrified and understandably “on edge” and clearly Presidential in their anxiety for this country’s grim future, seemed they were more concerned about their scripted lines and moot innocuous questions from the NBC media.

I’m voting Nader. I may not agree with him on all issues, but at least Dr. Nader’s proposed change is real.
22 mukoh // Oct 9, 2008 at 3:51 pm

Nader’s change is too radical to ever get through, even if he was elected which is a very fat chance.
23 tlw // Oct 9, 2008 at 3:59 pm

The Tim,

Thanks for the straight answer. Good for you: have a thesis and follow through with it.
24 olaf // Oct 9, 2008 at 4:16 pm

b –

I’m not arguing that the bailout is working… I’m just saying that the Dow Jones is not the measurement to watch.

That said, I think the bailout may work, to some degree, once they actually start buying some of that toxic debt. So far, all they’ve done is start getting organized. Paulson was clearly hoping for a psychological benefit when the plan passed, but things took too long, and the cynicism grew too deep. There are no more quick psych fixes. The only thing that can work is a consistent, long-term policy of recapitalization of the banking system. Banks are going to have to see the government stick with it for a good month or two — or longer — before they start feeling comfortable lending to each other again.

Which is — alas — an argument for government buy-in of the banks themselves. Perhaps the U.S. Government has to take a temporary ownership stake to force the lending to start up again.

This isn’t about overpriced houses and liar loans anymore, guys. Yes, that’s how it started, but now we’re talking about an economic heart-attack of massive proportions. Legitimate businesses that had nothing to do with real estate — your employers, probably — DEPEND on the revival of the credit system. If it stays frozen, millions of innocent Americans who never bought or sold a house will end up out of a job. I have just as much schadenfreude as the next bubblehead (thank GOD I resisted the siren’s song to buy a house when I arrived in Seattle in 2005)… but now things are way, way beyond our little spat over how much a crappy craftsman is worth.
25 Watching Rome Burn? at The Great Unwind // Oct 9, 2008 at 4:24 pm

[...] bloodbath day for the DOW, which is off 39% from its peak, along with the S&P 500, which is off 40% (and Gold is now more expensive than the S&P [...]
26 Markor // Oct 9, 2008 at 4:39 pm

@ 25, the Dow is 39% off the peak.
27 Markor // Oct 9, 2008 at 4:48 pm

Jen: We’re so interconnected. This recession/depression isn’t just going to hurt those who were irresponsible. You won’t be rewarded with a great standard of living and a cheap house.

What am I missing?

Those who haven’t invested in these Ponzi schemes, or got out early, could indeed end up with a better standard of living and a cheap house (the former in part because of the latter).
28 Markor // Oct 9, 2008 at 4:51 pm

Today I heard the first ad on the radio for something like this: “Did your retirement not go as planned? Do you need to get back into the workforce? Sign up for job training today at…” That was fast; I didn’t expect those ads for a few years yet.
29 Thomas B. // Oct 9, 2008 at 4:58 pm

I haven’t read everything above, but I have one question.

Where is all the money going?

People are selling stock and receiving cash, but where is the cash going? Are banks and institutions just sitting on it? Banks may be using it to delever, but what about pension funds, mutual funds, hedge funds, etc. Where are they putting their cash?
30 Markor // Oct 9, 2008 at 5:15 pm

Thomas B, seems to me a lot of it’s going into Treasurys and the Japanese yen, places considered relatively safe. Keep in mind that the price of a stock can fall without any seller receiving cash; that happens when there are no buyers at the prices the sellers want.
31 Markor // Oct 9, 2008 at 5:21 pm

Lake Hills Renter: Sad thing is, if they hadn’t passed the bailout they would be blaming all this on the fact the bailout didn’t pass.

That’s why the Democrats had to pass it, even if they thought it was a bad bill. Better that than let the bad guys take control. They can effectively modify the bill with a new bill later.
32 david losh // Oct 9, 2008 at 5:21 pm

It’s a loss if there is a value. If the price of stocks goes down it will only reflect more accurate value.
The stock market had to correct back to actual value before Real Estate can correct to actual value. It is all inter related.
The cash is going into, from what i’ve heard, Municipal Bonds, or other extremely safe investments. I mention Municiple Bonds in particular because I’m thinking Treasuries, or Bonds, should be tanking here pretty soon also.
I’m curious about the security a government’s finances when they are throwing cash at cash heavey private enterprises. As I understand it corporations are sitting on mountains of cash from the positioning they have been doing the past couple of years.
33 cheapseats // Oct 9, 2008 at 5:39 pm

” mean if you believe E, syn, and KD have been so right for so long”

hmm so quiet from them, I guess no internet in the bunkers?
34 John // Oct 9, 2008 at 5:51 pm

Tokyo has halted trading. It dropped too much.
35 jon // Oct 9, 2008 at 6:15 pm

Lehman might be the cause of some of this:

http://www.businessweek.com/magazine/content/08_42/b4104000160047_page_2.htm

It sounds like they were doing pretty much what people we doing leading up to 1929.

There probably aren’t big piles of money anywhere. The money is just evaporating as assets lose value and contracts are closed out.

But some peope are just baling

http://biz.yahoo.com/ap/081009/fed_credit_crisis.html
36 LotharBot // Oct 9, 2008 at 6:16 pm

Jen:

yes, I am happy about the “financial meltdown” — because, the fact is, it’s simply a revaluing of a lot of assets “on paper” that have been overvalued for years. It’s going to be a painful process because so many groups let it go for so long, and so many have been “living on borrowed time”, so to speak (and that part doesn’t make me happy)… but in the long run, it’s going to be good for us to get rid of the “do everything on credit” mentality and restructure our economy in a more fundamentally sound way.

And those of us who were wise with our money leading up to this point are now in a great position to pick up a lot of assets at a good price.
37 unearthly // Oct 9, 2008 at 6:26 pm

Lehman swaps settlement at 2pm tomorrow; could trigger close to $360 billion in losses for sellers. Expectations is for Lehman bonds to fetch 10-cents on the dollar. CDS sellers will cover the difference.
38 Thomas B. // Oct 9, 2008 at 6:36 pm

Even if we assume that some of the lost value in the stock market wasn’t realized in sale of stocks. Sale of stocks did happen, especially with institutional investors. There is a lot of cash sitting around, which I believe with help the capital levels at banks, which in turn will help the ability to lend, whether it be to other banks or to businesses and consumers.

While some cash may move to muni bonds, treasury bills, and other safe havens, I doubt a smart person would pass up arbitrage opportunities. For example, while financial stocks are not attractive, I believe recession stocks are attractive (tobacco, alcohol, and gambling). I also believe basic goods companies will be an attractive long bet; i.e. Proctor and Gamble, Altria, Costco, etc.

At some point institutional investors will find a better investment than munis, t-bills, and yen.
39 Slumlord // Oct 9, 2008 at 6:38 pm

I have mixed feelings about the meltdown. It needs to happen because the price of postponement is an even bigger disaster. While I have lost 30-40% of my net worth since June, I consider myself lucky because I still have assets and thus flexibility, which is more than most people (many of whom have no idea how vulnerable they are). Even though my daytime employer is making some drastic layoffs, my position is likely safe until at least next year and I can afford an extended unemployment if I am wrong. What sucks is seeing my friends and coworkers who do not have a cushion lose their jobs. It is heart wrenching.
40 dreadlord // Oct 9, 2008 at 6:50 pm

It was Imaginary Money, it never existed, and just vanished whence it came.

Example:

I buy 101 Marbles for $1 each.

Jane buys 1 Marble from me at $3.

So market price for my marbles is now $300. I am now $200 richer in an imaginary sense. This is the Stock Market.

Jane decides she doesn’t need the marble anymore, sells it back to me for $1

So market price for my marbles is now $101, what I paid for them.

Did I lose $200?

The only person that lost money was Jane, who lost $1. However, on paper, everyone who thought they were rich based on the $3 price just lost 66% of their money.
41 Jonny // Oct 9, 2008 at 7:15 pm

Slumlord: your position is not safe. Just because you lost 30-40% doesn’t mean you can’t lose 70-80% before it’s over. My personal feeling is that most paper assets are presently unsafe.
42 TJ_98370 // Oct 9, 2008 at 7:21 pm

To run counter to the doom and gloom, I’ll share the particulars of a real life “family” portfolio. Maybe it will put some perspective on the current situation.
.
The make-up of the portfolio is as follows (buy and hold, all dividends and interest reinvested):
.
17% money market fund
14% common stock - T, MO, BA, JPM, KFT, PM
55% mutual funds - conservative muni- bond, tax free type funds
12% muni bonds
06% cash
.
As of today, it is still up 27% from original value as of October 2001. That is equivalent to earning a little over 4% annual return, which is better than most CD’s. To be sure the portfolio lost 10% from peak in May 2008 of which 5% was since the beginning of this month.
.
Draw your own conclusions.
.
43 Slumlord // Oct 9, 2008 at 7:26 pm

Dreadlord,

What you say is true. The measure, for me, is how can those imaginary assets be translated into productive action. There is a possibility, maybe only 10-20%, that my only true asset is a shelter on a small in-town lot with some fruit trees and a vegetable garden. I will be ok if that is all I really have. However, if the imaginary economy crumbles that badly, many, many, people will experience real problems like homelessness, malnutrition, and the increase in crime that goes with desperation. Experience taught me the value of frugality, and I hope that it has prepared me for the future that seems increasingly likely to come.
44 jon // Oct 9, 2008 at 7:36 pm

If there were big piles of available cash at institutions, then solid companies would be able to borrow. But the Fed has pumped something like $1 trillion recently and there still isn’t enough. It is either disappearing or it is locked up ahead of the Lehman settlement. If it is Lehman, tomorrow could be the MOSR - mother of all stock rallies as everyone jumps back into the market after the settlement.

The comparison to the $1 versus $3 stock is part of it, but the volumes are so huge that it means people really are pulling out vast amounts of cash at really crummy prices. The P/E ratio is now too low even assuming a major recession, and recessions don’t last forever.
45 jonness // Oct 9, 2008 at 7:47 pm

Holy Chomolee! Good golly Miss Molly, you sure to know how to throw a party!

I realized the bailout was a crock of gaga, but this is exceeding my wildest expectations. Everybody I know is freaking out because they’ve lost a good portion of their wealth in this economic downturn. What’s next, a national bank run? If that happens, its lights out for a very long time. I think we’ll mostly escape it though. Even so, things are bound to get reaaaally ugly.

Hang on Ralph! That genius Bernanke is the world’s foremost expert on seeing and averting depressions! He’s darn near as good as Greenspan is at Lassie Fair economics.

We in a heap o trouble Hoss!
46 Peckhammer // Oct 9, 2008 at 7:59 pm

Honest question: are regular posters on here **happy** about this?

I am delighted. With the dow having dropped so much, and likely to plunge even further, this is a buying opportunity that would not have been possible without a time machine. Today I was buying at 2003 prices. Tomorrow I may be shopping in the ’90s.
47 TJ_98370 // Oct 9, 2008 at 8:04 pm

reference post # 42
.
Correction - 27% return over 7 years is equivelant to 3.5% annual return.
48 david losh // Oct 9, 2008 at 8:10 pm

#40

dreadlord // Oct 9, 2008 at 6:50 pm

It was Imaginary Money, it never existed, and just vanished whence it came.

Example:

I buy 101 Marbles for $1 each.

Jane buys 1 Marble from me at $3.

It is imaginary money until it is sold for a profit. That profit is real dollars and stuck away for maintaining the principle balance. If or after the marbles are sold the money stuck away may have a 10, 20, 50 ,100% return. If all you marbles get returned to you at ten cents on the dollar the profit is still stuck away.

The cash, the profits, the principle balances are stuck away all over the world. it’s global.
Those dollars never need to return to the stock market, real estate, or any corporate structure. It’s cash.
That cash can buy a small, medium, or large country.

You guys need to spend some quality time in a bunker with a hamm (sp?) radio to get the full flavor of what’s going on.
49 Matthew // Oct 9, 2008 at 8:10 pm

Jon,

Amazing to see that you are still somewhat bullish even in the face of a complete meltdown. I have a feeling the new wave of earnings will adjust the P/E ratios a little more realistically, starting with GE tomorrow. The projected earnings look HORRIBLE.

It’s going to be interesting to see what stick save Paulson and Bernanke attempt in the coming days/weekend.

I must say I feel vindicated now having been mocked on this forum and at work for stating that the financial markets faced a complete meltdown. What a difference a year makes.

BTW if you thought stocks were a good value at the beginning of the meltdown in 1929 you had to wait until 1952 to break even.
50 EconE // Oct 9, 2008 at 8:13 pm

FWIW…the DJIA has actually done better over the last 12 months than most of the other major world markets. Check out the Japan, India, Hong Kong, Australia, Korea, China, Russia etc etc etc.

So much for all those *paper* rich foreigners coming to bail us out (or buy up all our condos)…it looks as if they have their own problems…not to mention their own housing bubbles too.

But I’m sure that they’ll (Central Banks, Governments…whoever) be able to “print” their way out of it (Weimar Style) just like we’ll end up doing.

Perhaps we should have a “Guess the future price of Gold” poll.
51 Slumlord // Oct 9, 2008 at 8:20 pm

Let’s be serious for a moment: this is not a time to party like 2003 or panic like 1929. It is time to prepare. If we are lucky, there will be a world-wide repeat of Japan’s lost decade of the 1990s. More likely, conditions will resemble the great depression when unemployment reached 25% (compared to about 6.2% today). Worse yet, things could go really wrong. I say there is a 10-20% of complete and utter chaos that would last a year or more. If I am right, it would be well worth taking some time to lean about self-sufficiency and to meet one’s neighbors, just in case that 10-20% happens.

There are several things seemingly unrelated to housing that could, depending on their timing, combine with the banking crisis to make things very bad for all of us. Some of the risks are totally unknown, but some are simply little-known.
52 rent for now // Oct 9, 2008 at 8:29 pm

yikes! nikkei down 10%+
53 jon // Oct 9, 2008 at 8:34 pm

“BTW if you thought stocks were a good value at the beginning of the meltdown in 1929 you had to wait until 1952 to break even.”

That omits dividends. With dividends, the break-even was 1945. That’s not great, but indicates that investing requires patience. If you look the how returns are over time, you don’t get the high returns unless you are in the market all the time so get the sudden spikes that occur. Previous downturns have been followed by rallies, and I don’t see why this one is any different. The massive panic is really rather amusing, and I have lost as much as anyone has over the past year, on paper. All the means of production are running fine, and all the motivation to keep it running are still present. Between 1929 and 1945 there was massive devastation to the world’s infrastructure. As long as that doesn’t happen, this recovery will be much quicker. I happened upon the history by Heroditus today, and so I was reading his account of the Persian invasion into Europe, and what the Europeans were like back then. Really makes you appreciate what we have today. Bottom line is to keep your eye on your treasure in Heaven.
54 BrianL // Oct 9, 2008 at 8:45 pm

From the sounds of it, the bailout money hasn’t been applied yet. Or at least it sounded like they were still in planning.

I don’t believe it will ‘fix’ the situation. It could make the fall more drawn out. That sounds bad, but if it avoids the total chaos/social collapse point it may be better for long term.
55 jonness // Oct 9, 2008 at 8:56 pm

“Honest question: are regular posters on here **happy** about this?

What am I missing?”

A lot of us have been watching this situation develop for a long time, so we have positioned ourselves to make money on the collapse or at least be able to tread water. Please understand, I’m not happy that people are getting hurt in this economy. However, I’m not going to purposely hurt myself just because others are short-sighted when it comes to money.

My advice to you is to leave emotions to times of interacting with your friends and family, and use pure logic (free of greed, fear, and lust) when it comes to the economy. We are all going to die sooner rather than later, so it is extra important to live well in between now and then. There isn’t a thing we can do to stop these greedy crooks who’ve destroyed the U.S.A. with the pipe-dream called “trickle-down economics.” So save yourself in order to take better care of your friends and loved ones when things get really bad.

I spent a lot of time as a starving musician traveling around the world and playing original music. I know all about living without. I’ve even been homeless in the streets of a foreign country without a dime in my pocket or a ticket back to my homeland. I had the clothes on my back, and played guitar in the streets in order to save up enough money to get home. That’s not easy, but I was fully alive in those days and wouldn’t trade it for the world.

By the same token, I spent some time living in a relatively wealthy manner where money was pretty much no object. It took a lot of hard work, courage, risk, and creativity to make that happen. I’ve seen both worlds and pretty much lost it all when I lost my health. More recently, I recovered my health and have been living in a pretty straightforward manner, so I guess I’ve seen in between the extremes as well.

My final take is, you don’t need a lot of money to live extraordinarily well, but if it runs out completely, the dream is over. So start saving for a rainy day, and keep an eye on the political crooks, whose plans for this country are not in the best interest of its citizens. Once you learn to second guess their motives, you’ll have developed the skills it takes to survive in a more meaningful and enjoyable manner. It is important to live outside the fishbowl looking in as opposed to living inside the fishbowl lacking the understanding that an outside environment exists.

Americans have survived recent times purely off their sense of entitlement and good credit history. Now that they have developed a bad reputation for credit, the sense of entitlement will fade toward the realization that race, color, creed, and nationality has very little to do with human worth.
56 jon // Oct 9, 2008 at 9:04 pm

“From the sounds of it, the bailout money hasn’t been applied yet. Or at least it sounded like they were still in planning.”

As of Wednesday Fed had already lent $431 billion, which is separate from the bailout, and I don’t think it includes things like the FM’s.

http://www.marketwatch.com/news/story/fed-lends-record-431-billion/story.aspx?guid={47A1DE30-F17D-4A31-98CD-3B8D16C11CA2}&dist=msr_1
57 DLS // Oct 9, 2008 at 9:04 pm

Guys, as ugly as this is, and I type this as a ‘lowly’ renter who lives below his means, the Dow dropped ~20% in one day in 1987 and we are still here. The market may or may not continue to drop, but things are only a loss if you sell. We may have a recession, times may get a bit tight, but the economy and country isn’t going to collapse.

Besides, if the economy and country does collapse, then copper brass and lead may be more important precious metals than gold or silver.
58 Matthew // Oct 9, 2008 at 9:27 pm

The entire global financial system is broken right now. The equity markets are a small indicator of the entire picture. Credit markets are completely frozen. What happens the next week is crucial.

I could care less about what the DOW is at or the P/E ratios of stocks.

IT’S ABOUT THE CREDIT MARKETS, NOT EQUITIES. If the credit markets remain frozen we are dangerously hovering above the abyss. Everything operates on credit. Stay tuned.
59 Matthew // Oct 9, 2008 at 9:31 pm

The current situation is absolutely nothing like 1987. Horrible analogy. Stop looking at stock markets and watch bonds, spreads, and credit. Equity markets are full of short bus riders.
60 Matthew // Oct 9, 2008 at 9:35 pm

Investing requires patience? Like baby boomers have 16 years to wait for their 401ks to bounce back?

Reassuring.
61 LUC // Oct 9, 2008 at 9:56 pm

Matthew,

You are absolutely right… it’s about the credit markets. My younger brother works for ING Barings in NYC and trades commercial paper. I spoke with him yesterday and he said the credit markets are frozen solid. He’s hoping and praying that the commercial paper he currently holds matures before any banks (his customers) go under.
62 Matthew // Oct 9, 2008 at 10:04 pm

Very few people on this forum understand what is going on. They are talking about stuff like 1987, value investing, and other strategies that apply to a normal market.

The Commercial paper market is FROZEN SOLID. We do not have 3 weeks for the TARP program to be implemented, the government must force financial institutions to come completely clean (100% transparency) and stop playing hide the salami.

Liquidity is not the problem, insolvency is. None of the institutions want to lend to one another because of counter party risk and the fact that they don’t know what one another has.

Suppose you are in a room of 100 people and 5 of them are lepers. Are you going to shake anyone’s hand even if 100 extra people are added to the room? It’s not about liquidity! Pumping more money won’t do anything to help the situation until the turds are flushed down the toilet!
63 TJ_98370 // Oct 9, 2008 at 10:08 pm

I guess when you see the term “Federal” in your local bank’s name you can take it literally now.
.

Treasury Secretary Henry Paulson is weighing plans for the U.S. government to invest in banks as the next step in trying to resolve the deepening credit crisis.
64 jon // Oct 9, 2008 at 10:09 pm

“Like baby boomers have 16 years to wait for their 401ks to bounce back? ”

This crash has been a huge help to the post-boomers by giving them a chance to buy into the market at a great price. It seems that the boomers’ plan to have an early retirement by selling their real estate and leaving a $10 trillion debt to later generations didn’t work out so well.
65 EconE // Oct 9, 2008 at 10:38 pm

Matthew…I understand….however…I have a funny feeling that in that room you talk about…95 are lepers…if not all of them.

I’m expecting some hardcore deflation.

Cash and carry.

That’s how fortunes were made during the Great Depression.
66 LUC // Oct 9, 2008 at 10:40 pm

Jon,

Equities are not going to bounce back anytime soon until the credit markets are unfrozen. This will impact both boomers and non-boomers.
67 BrianL // Oct 9, 2008 at 11:01 pm

I hear many people talking about this as an opportunity to buy low. Why do people expect the markets to rebound in a significnt way within 10 years of this resolving?

If it gets as bad as many people here hope, we could be looking at a decade before ‘buying in low’ pays off if you don’t magically buy in at the floor.
68 jon // Oct 9, 2008 at 11:34 pm

“Why do people expect the markets to rebound in a significnt way within 10 years of this resolving?”

Once the credit markets start working again, companies can resume what they know how to do,which is to earn a profit. Nothing fundamental has changed outside the ownership of some financial companies who managed risk badly.

We shall see tomorrow how much the $400 billion Lehman unwind allows business to resume. If so, we can wrap up this recession and get back to normal pretty quickly. If the market is still stuck, then it seems to me that it is because companies not knowing who sold what derivatives. So there would a great opportunity for new banks and money funds to start up that have in their bylaws that they are derivative-free and will only lend only to derivative-free companies.
69 buyStocks // Oct 9, 2008 at 11:43 pm

BrianL,
No reason to try to speculate the bottom. I’m just increasing my dollar cost averaging into index funds.
70 mukoh // Oct 9, 2008 at 11:45 pm

One of my portfolio legs lost 50%+ in Europe, and 55% in Russian stock markets. So trust me 20% loss is NOTHING. So sit tight chill out.
If you think having saved up a $150k egg is a big deal, its NOTHING as well, when currency reverse swap will put you in the same place that everyone is at, only they have paper, and you have cash. :)
71 mukoh // Oct 9, 2008 at 11:50 pm

Mathew,
Where do you get your information?
DO you realize that GOV knows all about how the banks function, and how it is done? Stop telling people about tin foil hats and theories, there is nothing new for people in the system or around it, and simple folks will never understand.

Turds are getting flushed down the toilet and absorbed on daily basis for pennies on the dollar, there will be 3-4 big banks left with enough power to cripple any government policy.
72 Markor // Oct 9, 2008 at 11:52 pm

BrianL @ 67, I highly doubt this will be a 10-year event. Most financial events move faster now. Unlike the doomers above, I don’t see this credit crisis on the same order as a nuclear war. The solution is fairly simple; it’s just unsavory. The banks need to be nationalized, in whole or in part. Unbridled capitalism is bad for the public at large, we’ve known that since the Superfund cleanup sites arose. Now we know that we have too much capitalism and too little socialism. Republicans will never fix that though–their careers depend on making the rich richer, via all the shenanigans we’ve seen. It will take Obama & party. Things will get worse before they get better, but I doubt guns & gold will be needed.
73 mark // Oct 10, 2008 at 12:35 am

Why don’t you take the profanity filter off and let RAL through? [name-calling removed by editor]
74 what goes up must come down // Oct 10, 2008 at 1:38 am

I do find it a little funny that people always blame politicians for everything but never the CEO’s of the companies who profitted by all this, hmmm the CEO of Lehmans made what 350 or 400 million (his count) where is the outrage? In fact why don’t people look in the mirror and take some responsibility themselves. You vote and you chose. I know sniff, sniff, I wanted a third party choice — well then do something about it instead of just "dog"ing about things try to change things. I think Tim Eyman is an Ahole but I give the guy credit for making an effort.

Americans love to buy crap — consume, consume, consume.

Now McCain comes out with this plan to basically give lenders money for depreciating assets and some people are actually cheering this.

I don’t believe Obama is a savior but give me a break where is the outrage that one of two people who will be Prez is even floating a turd like that.

I am losing in this just like everyone else but I know life will go on, I don’t need or want a big screen TV, Iphone, SUV, or other self indulgent crap so if I can’t get credit to buy this crap I could careless.
75 Matthew // Oct 10, 2008 at 3:47 am

Mukoh,

I am the .gov. And what I am saying is not tin foil, it’s reality. Either embrace it or get out of the way. If people don’t understand what is going on, they have no reason to be in this market.

Nothing has been done with the turds. The Fed is simply pouring more water in the bowl. No one has hit the handle to flush. I anticipate this could be coming tomorrow, the banks could be forced to put this junk on their balance sheets. This could be frightening.

We will see.
76 Robert Wojciechowski // Oct 10, 2008 at 4:45 am

Why can’t the treasury loan money to all people. Trillions of dollars have been wiped out. Now we can just print the money.

Or the Fed can start buying stocks on the stock exchange and that could be cool. They would then artificially inflate the prices.

What are your thoughts on this?
77 Matthew // Oct 10, 2008 at 4:57 am

Robert,

Attempt to hyperinflate our way out of this would instantly destroy the bond market as well as our currency. Countries would stop buying Treasuries and we would not be able to fund anything.
78 gortnerp // Oct 10, 2008 at 5:42 am

Way off topic, but check out this Eastside FLOP.

http://www.redfin.com/WA/Bellevue/172-131st-Ave-NE-98005/home/507179

Bought May 23, 2006 for $1,160,000, sold Sep 26, 2008 for $656,000.
I wonder if it was a foreclosure, or something similar? Is there a way to find that out?
79 Robert Wojciechowski // Oct 10, 2008 at 5:54 am

Ok. So what about getting the public to focus on sthg else. Maybe start a war with Iran and try to get their resources?

I am surprised that Iraq is already not contributing heavily to alleviate the crisis. We could send them some consultants on democracy and they could give oil for very little money.

I am sure there is a way out of this.

People need to focus on some different threat like terrorists and 3rd world countries should give all their resources for peanuts.
80 LUC // Oct 10, 2008 at 6:04 am

“We shall see tomorrow how much the $400 billion Lehman unwind allows business to resume. If so, we can wrap up this recession and get back to normal pretty quickly.” Jon, you have would more of a chance of winning the lottery than this happening.
81 David McManus // Oct 10, 2008 at 6:44 am

I guess yesterday wasn’t the bottom.

http://money.cnn.com/data/markets/dow/
82 Agent // Oct 10, 2008 at 7:41 am

gortnerp,
The house in Bellevue you are asking about actually sold for $825k, redfin’s info is off a little because the tax records aren’t reflecting some sort of side deal between Real Properties Inc. and the lender (?? don’t know what was up).
This was a house that was purchased for $1,160k in May 2006 as redfin shows, and was mortgaged through WAMU with a $928k first mortgage and a $232k second mortgage - appears it was 100% financed! Very nice.

The listing talked about the short sale…
83 David McManus // Oct 10, 2008 at 8:13 am

“This was a house that was purchased for $1,160k in May 2006 as redfin shows, and was mortgaged through WAMU with a $928k first mortgage and a $232k second mortgage - appears it was 100% financed!”

Reason # 82 about why WM went out of business. WOO HOOOOOO!
84 gortnerp // Oct 10, 2008 at 8:50 am

Thanks, Agent.

“Information is Power.”
85 rose-colored-coolaid // Oct 10, 2008 at 8:51 am

Tim,

In reading the comments, I’ve seen several posters ask the question “Are you guys happy about this crash?” It seems like you need some disclaimer that explains the majority opinion on this topic, or at least your own opinion just to clear things up for these people.

To anyone curious, here’s my explanation. No, I am not happy about the crash, in fact I am nervous about it. I don’t really have much money in stocks either way, though I do have a long-term retirement account which has been marginally punished.

Rather, I would compare my view of this crash to the scientist who predicts a earth shattering catastrophy in blockbuster end-of-the-world movies. The scientist tells everyone that a giant earthquake could sink Manhattan, everyone laughs at him. He goes back and checks his numbers, and they look more likely than they did the day before. Then the earthquake hits killing thousands. The scientist can’t do anything to help at this point, and he feels bad for all those who died - wishing they had listened to him sooner. But, now that it has happened, he’s got a ton of new data to look at and explain. His job is, after all, explaining the data. So, rather than be devastated, he is fascinated.
86 David McManus // Oct 10, 2008 at 9:15 am

I share what rcc said. In a way, I feel vindicated. That being said, it’s kind of like an argument with the wife. You can be right, but the few days afterward can be hell.
87 Jonny // Oct 10, 2008 at 10:12 am

Hell, at this rate, we may hit 7000 before Halloween, forget Thanksgiving.
88 geon // Oct 10, 2008 at 10:42 am

Pondering whether I should put 10% back into retirement fund. Sold at 13.67, now about 8 (depending on close). Figure to average in the next year. Ten years from retirement, or at least my wife is. :) 10% reps. about $20K.
89 John // Oct 10, 2008 at 11:02 am

Unless the end of the world is coming, buying now is a good idea. Dow is at major support.
90 Markor // Oct 10, 2008 at 11:07 am

geon, I’d wait to see, esp. with only 10 years to retirement. Highly likely this isn’t going to pop back up fast, as it isn’t a random sell-off. The bottom could be at your fund’s 5, or 3.
91 masaba // Oct 10, 2008 at 11:40 am

Does anyone have ideas on a strategy for investing in a market like this? For example, if I have 10K to invest, should I invest 1K this week, 1K a month from now, 1K a month after that? I know that just dumping it all in at one time is probably not the best idea. Also, what would be a good strategy for diversification?
92 TJ_98370 // Oct 10, 2008 at 11:44 am

It really looks like the Dow may close South of 8000 today.
93 TJ_98370 // Oct 10, 2008 at 11:52 am

SELL! SELL! SELL!
.
I guess Jim now thinks we’re going to have an “L” type recovery as opposed a “V”, “W”or a “U”.
.
Jim Cramer: Time to get out of the stock market
94 geon // Oct 10, 2008 at 12:02 pm

I just realized that T. Rowe Price 2025 target fund is the same price as the DOW (maybe they all are. LOL) Fund topped out at 14.50 and DOW 14,100ish. DOW 8200K, Fund 8.50. The fund is a hair higher in price.

I probably saved 110K+ from losses by selling 1st qtr. last year, still left 25% in the fund. I didn’t want freak the wife out to much at the time.

I held QID for better part of a year, but got freaked out every time the Gov. intervened when I was about to make a kllling. I also held DUG. Sold both over 50 percent lower than what they are at now. OUCH!!!! I never hit the homeruns.
95 David McManus // Oct 10, 2008 at 12:29 pm

Now up 30. 1K swing in a day.
96 TJ_98370 // Oct 10, 2008 at 12:58 pm

Wow! Up 750 in 40 minutes. That’s obviously the work of the mythical, omnipotent Plunge Protection Team!
97 uptown // Oct 10, 2008 at 1:20 pm

masaba,
Look into using options to control your risk. Go to your brokers site or biz.yahoo.com/opt/ for more info on how to use them.
98 geon // Oct 10, 2008 at 1:41 pm

I got out of bad trade from yesterday on that rally, was down over 2K this a.m., ended up with $151 profit.. I was literally seconds away from over plus 700—set limit order that happen to be the high of the day. By the time my market order was executed , it was $2.50 lower. Wow. The stock, PM.
99 jon // Oct 10, 2008 at 1:53 pm

Here is some speculation that the selling is not quite over yet:

http://www.nakedcapitalism.com/2008/10/are-hedge-fund-margin-calls-leading-to.html

“It seems that the major catalyst for this selling is the fact that the newest large banks primarily J. P. Morgan, Goldman Sachs, and possibly Morgan Stanley as well — have issued massive margin calls to hedge funds and other professional traders who use these banks as prime brokers… There are rumors that the most massive of the calls are due Monday (October 13th). If so, this market could continue to decline through then.”

Still, an enormous amount of uncertainty was resolved today with Lehman, so a lot of money has been unlocked.
100 patient // Oct 10, 2008 at 2:48 pm

Has the NAR retired Larry Yun as well?

http://money.cnn.com/2008/10/08/real_estate/financial_crisis_pulling_out_of_home_sales/index.htm?postversion=2008101014

“”You have to have a lot of confidence to make this kind of big-ticket purchase in the current environment,” said NAR spokesman Walter Molony. ”

Hmmm… Molony…rimes with “Baloney”. Anyway the article mentions a Seattle couple who backed out from a contract because in light of the economic developments they think there will be better deals coming up, Ya think?
101 LUC // Oct 10, 2008 at 2:57 pm

From Calculated Risk: Credit Spreads: Still Getting Worse

http://calculatedrisk.blogspot.com/2008/10/credit-spreads-still-getting-worse.html

These is still no relief in the credit markets.
102 Matthew // Oct 10, 2008 at 3:06 pm

There was uncertainty solved with the LEH auction all right, and it was not good:

“An auction of Lehman’s bonds yesterday determined that the bank’s borrowings were worth only 8.625 cents on the dollar. The valuation leaves the insurers of the debt a bill of about $365 billion. It is not clear whether the insurers, which are required to settle the bill in the next two weeks, will be able to pay – a development that could further undermine increasingly stressed capital markets.”

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4922981.ece

There are 60-70 trillion in credit default swaps (CDS) and they are worth about 8.6 cents on the dollar and somehow this is somehow a good thing because it “frees up some money”???? Pass the crack pipe please. The 700 billion dollar bailout is like a band aid on a bazooka hole.
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