After reading and hearing ALOT of different opinions on the bailout bill, and then seeing how the government is already using it, I have realized that it will probably be a big mistake. This is mainly because the government has chosen to use it (at least initially) in a way that likely won't help. It is also in a way that is different from which they insinuated when trying to get the bill passsed.
Essentially over 25% of it has simply been used to fund 8 different huge banks in the US ($250 Million). Now the government is getting preferred stock to hopefully get our money back, but it hasn't addressed the problem at all which is visability. By this I mean, banks still don't trust each other. Many companies are still loaded with crazy swaps and derivatives that know one knows the potential downside of. No one knows who has what, and therefore, who is the next to fall. And the companies that don't have them, they are being thrown in with everyone else.
Here is how Karl Denniger (a noted economist) describes it:
So you stole $250 billion that you allegedly were going to buy mortgages with (we knew that was a scam up front, as I said, but heh, you had to keep up the appearances until the ink was dry right?) and blew it on preferred stock in the banks - directly.
Sounds kinda Swedish. Except its not, because the Swedes, when they had this same sort of problem with their banks, did two things you didn't:
1) Forced shareholders to take all loss before taxpayer money was used.
2) Forced full, complete balance sheet transparency.
The second is the critical item and the one that you and Bernanke have continually refused to address. Yet this is the root of the problem with trust, when you get down to it. Nobody trusts the banks to lend to them because they have been shown repeatedly, over the last year, to be lying about their exposures and the state of their balance sheets, to the point of their CEOs showing up on national television days before they filed bankruptcy (as in the case of Bear Stearns)!
You have repeatedly thrown tens or even hundreds of billions of dollars at these institutions and it has, in each and every instance, disappeared into a black hole.
There is still time to get the situation fixed, but our "leaders" continue to baffle. However, time is of the essence. If things don't get corrected, you do not want to see the consequences.
I pray I am being overdramatic, and I pray the moves will start to get credit flowing, but each day I am becoming less and less confident. The kicker is that our economy was already in or about to be in a recession.
For a bit of levity, what am I going to do: I'm going to Disneyworld!!!! I really am. Julie and I have had this trip planned for many months now for our kids. It's not the best time for me to go, but hopefully it will help me get my mind off these things somewhat for a bit.
3 comments:
Chris,
Do you mind talking about what kind of a portfolio you have (long/short ...) and what are you doing to hedge the current down trend that's on the market? Obviously I don't mean the actual details, just an obscure overview.
Here is my guess scenario of what will happen - I think the market is going down to 7000-7500 in the next few weeks and then will rally from that point for a few months to around 10000-11000. At that point, it's anyone's guess. If the current moves work, we may never reach 7k again. If the problems remain or expand, we will set new lows. Once again this is just my "best guess." I don't want to go into details to how I arrive at this. Honestly, I will be surprised if I get it that accurate given it is a fairly specific scenario.
With this in mind I am looking for strong stocks with deep cash positions and a good dividend. Some examples include Verizon, Pfizer, Phillip Morris. I want companies I know can make it through a deep downturn and provide me with a good dividend. Further more these stocks are beaten down with everyone else. So they still provide good potential growth if we do not hit a deep recession/depression. Other areas to look if you want to be real defensive include gold/gold stocks (which previously I've never even considered). You can short positions, but I would never recommend this for the casual investor. Most importantly, is to get a fair amount of cash available (10% min) for any other opportunities that arise on these downswings. One example I got into heavily when the market bottomed last Friday, was Wells Fargo when it fell to 26 a share.
Despite all this advice, I am not overly confident in many decisions. Things have been changing so dramatically daily, that it is hard to give a strong opinion on anything. Just be smart but careful. The next 9 months are critical times. I have a feeling by then we will know exactly where the economy stands. This is something we have no clue about now.
Chris, I don't know if you read Mark Cuban's (sp?) blog but he essentially say's very similar things. I've also come to my own conclusion that a lot of these price slides are due to inst. investors panicking and redeeming out of hedge funds.
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