Thursday, August 23, 2007
What’s going on in the stock market and why?
LOOKING AHEAD by Wally Dobelis
On a mid-August day, fetching my lunch, I ran into a portfolio manager, on the same mission. “Crazy day, hnh?” “Crazy sixteen days, you mean!” We finished our short elevator ride in silence, lexchanging unhappy glances..
At that hour the DJIA was down 300, the lowest point of the current “market adjustment.” The Dow miraculously recovered, completing the day down 14, and the market kept rising. Apparently the heavy short sellers, hedge funds, private equity players and other masters of the universe, had decided to cover before a complete collapse of the world economy, and we were saved.
Everyone knows why the market panicked, this time. It seems that too many people bought their homes sweet homes without regard to their ability to pay, abetted by reckless mortgage brokers & low interest rates. The mortgage lenders bundled up on risks, good and bad, and sold the paper to wholesalers who packaged the mortgages by risk category and sold the packages (strips, tranches) to investors. When many of the high-risk homeowners failed to make their payments, the values of the packages dropped, particularly those of subprime risk mortgage bonds. Some over-leveraged mortgage companies filed for Chapter 11, losing operating funds when their concerned lenders decided to make margin calls. Many investors in the bonds tried to sell, but no one would buy, and the wholesalers had to dump other properties to raise the money. Some bond funds failed, such as Bear Stearns, and in France the Paribas bank ceased trading in others. That snowballed into the world-wide market price drops.
Federal Reserve and national banks, recognizing the dangers to the world market, tried to save the market makers, mostly legitimate banks and dealers, by lending them money at low rates (subsequently also lowering bank loan interest). They provided $200 billion of support funds world-wide in mid August 2007, to stop the dumping, but the sellers’ pressure continued. And that was just to help the ordinary markets, pension funds and such. Hedge funds and their ilk, recognizing the risks of sudden price drops, have investors signed up on long terms, such as seven years, and do not permit them the right of redemption except at long-notice time windows, thereby reducing the pressure. Hedge fund investors must eat much of their losses, with a hope of recovery as the selling pressures reduce. Some majors, such as Goldman-Sachs and Maurice Greenberg, put some of their billions in the funds, to reduce the pressure and protect their investments. These mechanisms have been developed over time to stop stock market catastrophes, since 1929, the classic event of snowballing price drops. Now new speculation techniques and vastly increased funds invested in the market have made them less secure. A lot of market price advances are prompted by new money, as well-heeled people and countries, local and foreign, push more dollars across the counter. The pressure to buy shares creates artificial price advances, until a segment of the market, recognizing that the price/earnings ratio is too high, decides to sell.
In recent decades, the Panic of 1979 was caused by the Iranian Revolution and the temporary loss of Iranian oil in the world market. The Panic of 1987 (“Black Monday”), created a stock price loss of nearly 23%, almost double that of 1929, largely prompted by a rush to switch to bonds when the return on a 30-year Treasury reached nearly 10%. It was accelerated by program selling, a system that created automatic sell orders at certain price levels, which in turn depressed prices and prompted more sell orders. with the technological snowball fixed by inserting stop-sales “brakes,” the market recovered in two years.
The subsequent exuberant market of the Internet era collapsed in March 2000 when people finally realized how artificial the market values were. Typically, Red Hat gave away Linux systems and yet attained a market value in millions.The Longterm Capital Management hedge fund crisis was based on market models by Nobel Price winners. These incredibly leveraged investments in currency and other safe securities first blew up when the Russian ruble devalued. Other threats? The leveraged buyouts of the 1980s, linked to Michael Milken of Drexel Burnham Lambert, were painful, particularly for employees. Financiers made high offers to privatize companies, paying for them by bonds issued on the newly purchased firm’s book values, selling less productive units and doing tricks with retirement funds, then reselling the companies. Some failed when the restructured companies could not produce profits. The LBOs have returned, in the form of the currently prevalent private equity buyouts.
We can hope that we are safe from primitive frauds like the pst-WWI Ponzi scheme, persuading people to buy International Postage Coupons impervious to currency price fluctuations, combined with repaying early investors from the deposits of later investors, but you never know. Is today’s pyramiding threat a new credit derivative that builds leverage on top of leverage? Can an Enron accountants’ scam recur? Is the subprime threat over? Not by a long chalk, it says here, not when the subprimes sold in 2005/6 alone amount to $1.2 trillion.
On a mid-August day, fetching my lunch, I ran into a portfolio manager, on the same mission. “Crazy day, hnh?” “Crazy sixteen days, you mean!” We finished our short elevator ride in silence, lexchanging unhappy glances..
At that hour the DJIA was down 300, the lowest point of the current “market adjustment.” The Dow miraculously recovered, completing the day down 14, and the market kept rising. Apparently the heavy short sellers, hedge funds, private equity players and other masters of the universe, had decided to cover before a complete collapse of the world economy, and we were saved.
Everyone knows why the market panicked, this time. It seems that too many people bought their homes sweet homes without regard to their ability to pay, abetted by reckless mortgage brokers & low interest rates. The mortgage lenders bundled up on risks, good and bad, and sold the paper to wholesalers who packaged the mortgages by risk category and sold the packages (strips, tranches) to investors. When many of the high-risk homeowners failed to make their payments, the values of the packages dropped, particularly those of subprime risk mortgage bonds. Some over-leveraged mortgage companies filed for Chapter 11, losing operating funds when their concerned lenders decided to make margin calls. Many investors in the bonds tried to sell, but no one would buy, and the wholesalers had to dump other properties to raise the money. Some bond funds failed, such as Bear Stearns, and in France the Paribas bank ceased trading in others. That snowballed into the world-wide market price drops.
Federal Reserve and national banks, recognizing the dangers to the world market, tried to save the market makers, mostly legitimate banks and dealers, by lending them money at low rates (subsequently also lowering bank loan interest). They provided $200 billion of support funds world-wide in mid August 2007, to stop the dumping, but the sellers’ pressure continued. And that was just to help the ordinary markets, pension funds and such. Hedge funds and their ilk, recognizing the risks of sudden price drops, have investors signed up on long terms, such as seven years, and do not permit them the right of redemption except at long-notice time windows, thereby reducing the pressure. Hedge fund investors must eat much of their losses, with a hope of recovery as the selling pressures reduce. Some majors, such as Goldman-Sachs and Maurice Greenberg, put some of their billions in the funds, to reduce the pressure and protect their investments. These mechanisms have been developed over time to stop stock market catastrophes, since 1929, the classic event of snowballing price drops. Now new speculation techniques and vastly increased funds invested in the market have made them less secure. A lot of market price advances are prompted by new money, as well-heeled people and countries, local and foreign, push more dollars across the counter. The pressure to buy shares creates artificial price advances, until a segment of the market, recognizing that the price/earnings ratio is too high, decides to sell.
In recent decades, the Panic of 1979 was caused by the Iranian Revolution and the temporary loss of Iranian oil in the world market. The Panic of 1987 (“Black Monday”), created a stock price loss of nearly 23%, almost double that of 1929, largely prompted by a rush to switch to bonds when the return on a 30-year Treasury reached nearly 10%. It was accelerated by program selling, a system that created automatic sell orders at certain price levels, which in turn depressed prices and prompted more sell orders. with the technological snowball fixed by inserting stop-sales “brakes,” the market recovered in two years.
The subsequent exuberant market of the Internet era collapsed in March 2000 when people finally realized how artificial the market values were. Typically, Red Hat gave away Linux systems and yet attained a market value in millions.The Longterm Capital Management hedge fund crisis was based on market models by Nobel Price winners. These incredibly leveraged investments in currency and other safe securities first blew up when the Russian ruble devalued. Other threats? The leveraged buyouts of the 1980s, linked to Michael Milken of Drexel Burnham Lambert, were painful, particularly for employees. Financiers made high offers to privatize companies, paying for them by bonds issued on the newly purchased firm’s book values, selling less productive units and doing tricks with retirement funds, then reselling the companies. Some failed when the restructured companies could not produce profits. The LBOs have returned, in the form of the currently prevalent private equity buyouts.
We can hope that we are safe from primitive frauds like the pst-WWI Ponzi scheme, persuading people to buy International Postage Coupons impervious to currency price fluctuations, combined with repaying early investors from the deposits of later investors, but you never know. Is today’s pyramiding threat a new credit derivative that builds leverage on top of leverage? Can an Enron accountants’ scam recur? Is the subprime threat over? Not by a long chalk, it says here, not when the subprimes sold in 2005/6 alone amount to $1.2 trillion.
# posted by Wally Dobelis @ 5:28 AM 
