Glenn Wilson

Are the U.S. Stock Markets at a bottom? Are they at THE bottom? There was a huge selloff last Friday and then the markets rallied, although they did fall off at the end of the day. The Dow and S&P 500 finished negative on the day and the Nasdaq was slightly up for the day. Last week was the worst week ever for the stock market.

At this moment, the Asian markets are up. European markets are up. U.S. Market futures are up. The TED Spread is down but still very high.

If this is a typical post WWII recession and bear market then we should be at or very near a market bottom. But, we know enough to know that this is not a typical bear market or recession. Things that are different are not the same.

If this is more like the 1870 or 1927 crashes then the market still has a long way to fall and a long time before it rises. Compared to those scenarios there are many reasons for optimism. At least so far.

If the market rallies today will it be sustainable or will it be a sucker's rally? Is there still more de-leveraging and forced selling to come?

Some of the answer about the future of the economy and the markets will depend on governments action that is still yet to come.

The chairman of the Federal Reserve is also one of the nation's pre-eminent scholars of the Great Depression.
Fed chief guided by lessons from Depression

He must be an expert on the Great Depression because so far, he and Paulson and the Bush Administration have taken all of the right steps to create the conditions for another one. But again, things that are different are not the same.

We'll see. Clearly, the economy will get worse before it gets better. The stock market is expected to recover before the economy does. But is that now or a year from now? How does one weigh the risk of further falls against the reward of rises in value? Another data point to compare against:

The Nikkei 225 is now almost back to where it was in 1981 and has never made any attempt to regain its 1989 peak.

S&P 500 VS NIKKEI 225

Labels: economy

Nouriel Roubini predicted this mess and continues to predict further mess.

The IMF warned on Saturday that the global financial system was on the brink of meltdown, while France and Germany pushed ahead with a pan-European crisis response to try to prevent the worst global downturn in decades.IMF warns of financial meltdown

German Chancellor Angela Merkel heads to Paris to present Sunday to her colleagues from the euro zone a financial sector bailout plan for Germany that's expected to be more than half the size of what has been enacted in the U.S.
German Bailout Likely to Be Over $400 Billion

Those responsible for the meltdown are trying to shift the blame to minorities and the poor:

As the economy worsens and Election Day approaches, a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail. ...

Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis. ...

Federal Reserve Board data show that:

• More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.


• Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

"I don't remember a clarion call that said Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster," said Neil Cavuto of Fox News.
Private sector loans, not Fannie or Freddie, triggered crisis

Now, as he spends his last months in office trying to avert a global economic collapse, Mr. Bush has been telling people privately that it’s a good thing he’s in charge.

“He said that if it was going to happen at all, he was glad it was happening under his presidency, because he had a good group of people in D.C. working for him,” Dru Van Steenberg, one of several small-business owners who met with Mr. Bush in San Antonio earlier this week. The president expressed the same sentiment, others said, during a similar private session in Chantilly, Va., the next day.

“He said that whoever was going to take over in January was going to have a huge crisis on their hands the day they come into office,” Ms. Van Steenberg added. “He thought by this happening now, that perhaps everyone could see signs of improvement before the next president comes into office.”In Final Months in Office, Bush Is Burdened but Still Confident

Meanwhile, back in the world of reality and facts:

So what do we get from this? Well, the economy performed best under Clinton, then JFK/LBJ. Then Carter, and since he’s almost as good, we’ll call Reagan a tie for third. Then Nixon/Ford, with Ike and GW tied for sixth, and GHW bringing up the rear. And in terms of parties, there is no contest… the economy as a whole seems to grow faster under Democrats. Giving Reagan the benefit of the doubt, he’s the only the Republican that does as well as the worst Democratic President. 100% of Democratic administrations in the sample get at least a bronze medal.Comparing Presidents: Rankings of Economic Growth

Labels: economy

At this point the recession train has left the station; the financial and banking crisis train has left the station. The delusion that the US and advanced economies contraction would be short and shallow – a V-shaped six month recession – has been replaced by the certainty that this will be a long and protracted U-shaped recession that may last at least two years in the US and close to two years in most of the rest of the world. And given the rising risk of a global systemic financial meltdown the probability that the outcome could become a decade long L-shaped recession – like the one experienced by Japan after the bursting of its real estate and equity bubble – cannot be ruled out. ...

At this point the risk of an imminent stock market crash – like the one-day collapse of 20% plus in US stock prices in 1987 – cannot be ruled out as the financial system is breaking down, panic and lack of confidence in any counterparty is sharply rising and the investors have totally lost faith in the ability of policy authorities to control this meltdown.

Thursday midnite update: A few hours after I had written this note the market crash that I warned about is underway in Asia: the Nikkei index in Japan is down 11% and all other Asian markets are sharply down. This reinforces the urgency of credible and rapid policy actions by the G7 financial officials who are meeting in a few hours in Washington and the need to also involve in such global policy coordination the systemically important emergent market economies.
The world is at severe risk of a global systemic financial meltdown and a severe global depression

Yesterday, IBM announced favorable earnings:

IBM posted a stronger-than-expected preliminary quarterly profit and stood by its full-year outlook, defying worries that the financial crisis would hurt demand for its computer products and services.
IBM Preliminary Profit Beats Expectations

But:

Shares of IBM fell $1.55, or 1.7 percent, to close at $89 on Thursday.
link

The stock market is the only source of "liquidity" (cash) for some big players. Unwinding and de-leveraging is leading to forced selling of stocks at distressed prices. Which lowers prices and the value of remaining leveraged stocks further. Which leads to more forced selling and reduced prices. So people pull money out of hedge funds and mutual funds forcing those to sell equities in a down market. Investors panic. Where does it end? How low can we go?

What should be done? The United States and Europe should just say “Yes, prime minister.” The British plan isn’t perfect, but there’s widespread agreement among economists that it offers by far the best available template for a broader rescue effort.

And the time to act is now. You may think that things can’t get any worse — but they can, and if nothing is done in the next few days, they will.
Moment of Truth

In this financial catastrophe, last week's unthinkable idea quickly becomes this week's imperative. The Bush administration is wisely contemplating following the lead of British Prime Minister Gordon Brown in having government take ownership shares in many banks to get them more cash and allow them to lend again.
Hoover vs. Roosevelt?

Labels: economy

For a number of weeks professional economists and experts of banking crises have been arguing that the proper way to resolve a banking crisis is not to buy toxic assets but rather to recapitalize banks directly via injections of public capital (in the form of preferred shares) into distressed but solvent financial institutions. We criticized the TARP legislation just passed by Congress for not allowing for such a recapitalization of banks via public capital (an approach that has been instead now taken by the UK with its $87 bn bank rescue package and even Belgium/Netherlands in the case of the rescue of Fortis).

So how come that "to inject capital into financial institutions" was the first item that Hank Paulson listed as his priority in his press conference yesterday, thus suggesting that now the US, like the UK, will undertake a partial nationalization of its distressed banks?

The reality is that the TARP legislation passed by Congress (formally the Emergency Economic Stabilization Act) does not in any explicit way allow for such recapitalization of banks via injection of public capital. The US Treasury has initially resisted including explicitly such authority in the Act for several reasons: the banking industry that helped drafting the legislation was against it; there was ideological resistance to the idea of the government taking equity – however preferred – in financial institutions; there was concern that being explicit about public recap of banks would lead to banks’ resistance to participate in the toxic asset purchase program. That is why the Treasury formally resisted putting any explicit wording of public recapitalization of banks into the legislation.
How authorization to recapitalize banks via public capital injections (“partial nationalization”) was introduced - indirectly through the back door - into the TARP legislation

But Congress went ahead and forced on Paulson a provision that said he had to get equity or senior debt from financial institutions in exchange for taking significant assets off their hands--effectively enabling backdoor recapitalizations. Yesterday Ben Bernanke hinted that a change in emphasis might be in the offing for the TARP. And today Paulson seemed to confirm it.

None of the people asking questions at the press conference really seemed to pick up on this, of course (&%%$# Washington journalists!). Along with Paulson's affirmation that the FDIC was going to use its "systemic risk" powers to protect depositors and unsecured creditors "as appropriate," I take it as one more sign that we're headed toward a Swedish solution of our banking crisis—recapitalization and temporary nationalization of much of the banking system. This is the right thing to do, I think. But I'm still a little bit confused as to why Paulson had to back into this instead of asking for it in the first place. Maybe because he thought President Bush would never sign a bill to nationalize the banks? Just a thought.

Treasury prepares for a TARP-and-switch. And it's a good thing, too

Labels: economy

Yesterday Thursday a senior market practitioner in a major financial institution wrote to me the following:

Situation Report: So far as I can tell by working the telephones this morning:

* LIBOR bid only, no offer.
* Commercial paper market shut down, little trading and no issuance.
* Corporations have no access to long or short term credit markets -- hence they face massive rollover problems.
* Brokers are increasingly not dealing with each other.
* Even the inter-bank market is ceasing up.

This cannot continue for more than a few days. This is the economic equivalent to cardiac arrest. Then we debated what is necessary to restart the system.

Financial and Corporate System is in Cardiac Arrest: The Risk of the Mother of All Bank Runs

Labels: economy

They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments. ...

The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary. ...

With that, the five big independent investment firms were unleashed.

In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves.

Agency’s ’04 Rule Let Banks Pile Up New Debt, and Risk

No wonder the bailout package is so poorly crafted: The same genius, Hank Paulson, that helped us to get into this, and has utterly failed to see this coming until it was all but on top of is, is trying to get us out. He is uniquely unqualified for this task. How this guy hasn't honorably fallen on his own sword yet is beyond me.

SEC Deregulation Let Banks Leverage Up

Labels: economy