The late rally Friday left stocks up for the day and provided some evidence that we may have seen a short term low. It would be good to see some follow through today, though it will be something of a victory if the lows for the S&P 500 hold at 666.
*****My inbox is crammed with your comments and questions, so let’s get to some of those…
***** E. Berger writes: I have been asking over and over, "Where did the money go?" My simplistic brain tells me that stocks go down due to sellers outpacing buyers. So why did that happen? Well, the story I heard recently tells it that as purchasers of stuff became unable to pay debt due to credit tightening, banks who owned these loans were then also unable to pay off debt (the accumulated effect of supporting the purchasing crowd). These large and then larger banks then try cover as much debt as possible and begin to sell large blocks of stocks. As simple as that sounds, it is the first logical reason I have heard about why so many sellers "appeared" in the market. The story goes on that the real debt remaining to cover is huge! So huge, that this sell to cover activity is expected to go on for some many years. They stated we can expect oscillations in overall stock prices, however a moving average will show a decline until 2013 or so. If this is true, why would anyone be buying stocks thinking we’re at a bottom? Today’s price may seem like a bargain relative to yesterday’s price, but what about when compared to tomorrow’s price?
Some estimates say that 40% of the world’s wealth has gone up in smoke since the financial crisis began. Some of that wealth is simply valuations, like home values and mortgage-backed securities held by banks. When these securities are considered as assets and are part of a banks capitalization, steep declines in their value has dire consequences for the banks – they are forced to sell other assets to raise capital to offset their impaired assets. There can be no doubt that that has led to lower stock prices.
This is one reason that the "mark to market" requirement for banks has been criticized. Mark to market requires banks to value certain assets according to what they could be sold for today. Clearly, nobody wants to buy mortgage backed securities right now, so their value may be artificially low. In a better housing market, these assets would be worth more, and banks capital base would be on better footing.
If current conditions persist, then yes, it could take a long time to rebalance the financial markets. But I’m hesitant to make too many assumptions on future valuations based on today’s stock prices because stability in the housing market can bring stability to other financial markets. There seems to be no shortage of buyers at foreclosure auctions, and that’s a good sign that a floor for housing prices can be found as inventory falls.
As for buying stocks now, the argument is very much based on historical patterns and an appreciation for the process of "slogging through" the myriad problems facing our economy.
*****Myles S. writes: Frankly, I am getting extremely tired of the financial community beating on Obama. You (and they) have no clue as to whether or not his full court press on this crisis will work. Why not wait to see how it plays out initially before you do all this carping and complaining?
Americans have a deep-seated opposition to the concept of "bailouts." And so the perception that irresponsibility is being rewarded generates a lot of anger. But would we honestly prefer to see nothing done, and let the markets continue to sink?
While we may disagree with certain aspects of current recovery initiatives, there can be no doubt that action is required. So I agree with Myles here, let’s see how things play out before condemning every move that is made.
*****M. Nehesi writes: I understand and accept that our president is attempting a recovery and financial stability plan. President Obama’s teams are taking immediate steps within his first 100 days in office to jumpstart and revive our economy.
The closing question is can it be done and can "President Barack" Obama do it. My short answerer is YES because America and Americans want to succeed; we want to come together despite our differences for a strong country.
*****And this from G. Summers: You seem to take issue with the current approach to fixing the economy. I used to trust the old small government and little regulation philosophy and the leaders of our financial institutions. It seems that this trust is not working. This system has just about killed the American goose that really laid the golden eggs because of greed everywhere from corporations, healthcare, education, and for sure energy with the cost of gas last summer. What you don’t realize is that 80% of Americans don’t want a truly competitive environment and want to do a honest day’s work for an honest day’s pay and look after their families and live in peace and harmony and occasionally sample the fruits of their labor. Your wall street rules don’t apply for these people. They don’t even know your writing exists.
They do know who Barrack Obama is and that they trust him now as their leader to slay the rich dragons.
I am executive myself but I am 61 years young and much wiser than most but not so rich in money.
The distribution of wealth got completely out of control in the minds of the middle class because it is the class that is either going up or down. In the last year I personally have had to change my entire outlook on retiring because I lost a large share of my investments with financial institutions that I trusted. I now have to trust someone so I chose Obama, I may not get as rich but I feel like I am also less likely to lose what I have now. You are part the problem because your team that executed the philosophy you cling too blew it when they got overly greedy. They were unaware of the common man’s ideas and wants and needs and only cared about their own.
They figured the common man needed to take care of himself and that’s exactly what the common man did He went out and got himself a dragon slayer called Obama. So you did it to yourself. Wake up and smell the roses! Mr. Obama is now the leader, I do happen to think He is brilliant and truly cares for the common man/woman and actually has a great respect for their power. Your philosophy on the other hand is lost and unaware, hopefully Mr. Obama can help you understand. You must be greedy to win at your philosophy and not care about the masses. Mr. Obama was voted in by the masses. Take your medicine!
*****For the record, while I may disagree with certain items of the bailout measures that have been proposed and voted for by Congress, I have never advocated that nothing should be done. It seems clear to me that "let ’em fail" is a recipe for a permanent decline in the U.S. standard of living.
*****The next Recovery Portfolio video conference is coming up tomorrow, March 10, 2009 at 6 pm Eastern time. We’re entering a trade that offers is highly likely to net 24%, and gives you 17% downside protection. You can register HERE.