Confidence takes biggest hit in 2 years

So the expected fallout from the housing market, the financial market turmoil, and tightening credit shows in the trailing indicator as of today. But since we've been posting in this forum, it's no surprise.

Recession is a good and necessary thing. It refocuses priorities, clears out bad investments, and reopens people's eyes to a more realistic world view.

In addition, for those who are sitting on the sidelines with cash, lowering prices are going to improve the leverage and value of investment dollars.

Save now, watch prices fall further, and look for signs the economy is rebounding. This fall? No way. Might be next year, but this could be a multi-year correction, especially with a lame duck presidency and likely transition to a new party.

http://money.cnn.com/2007/08/28/news/economy/confidence/?postversion=2007082811

US house prices tumble at record rate

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/28/bcnusa128.xml

The types of investments

What does a diversified portfolio mean? What are the different vehicles for investing?

Here's a good list of 20 different types of investments. To be honest, any business contract where you give over money, goods, or services is an investment. There are certainly very esoteric derivative contracts traded among hedge funds and super rich individuals, but there's a reasonably liquid and well-known market for a good 20 types of investments.

Depending on your life situation and the market, having percentages in one or the other will be more appropriate.

I'd be happy to answer questions, although I'd have to consult with my sister (stock broker/financial advisor) or brother-in-law (bond analyst) for more esoteric questions. I'm sure Animal Mother (trader/manager) and I think Ketchup has daytraded.

American Depository Receipt (ADR)
Annuity
Closed-End Investment Fund
Collectibles
Common Stock
Convertible Security
Corporate Bond
Futures Contract
Life Insurance
The Money Market
Mortgage-Backed Securities
Municipal Bonds
Mutual Funds
Options (Stocks)
Preferred Stock
Real Estate & Property
Real Estate Investment Trusts (REITs)
Treasuries
Unit Investment Trusts (UITs)
Zero-Coupon Securities


http://www.investopedia.com/university/20_investments/

Is Bernanke an interventionist

I'd be interested to hear from people who support non-intervention even when the entire economy may enter recession/depression. Greenspan's philosophy was intervention, Bernanke's wasn't, except he's now intervened 6 times in 2 weeks, heh.

http://www.moneyweb.co.za/mw/view/mw/en/page95?oid=154890&sn=Detail

Greenspan asserted that central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, he noted, the sharp stock market break of 1987 had few negative consequences for the economy. “But we should not”, Greenspan continued, “underestimate or become complacent about the complexity of the interactions of asset markets and the economy.

“Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy”. In the current instance the Federal Reserve has intervened not because asset prices were too high, but because uncertainties in increasingly opaque credit markets pushed investor uncertainty over the edge.

So, it turns out that not just people are over leveraged, I found out that hedge funds, who now own more assets than investment banks, can typically be 20x leveraged. In other words, for the billion they own, they borrow 19 billion.



So I gather that's where a lot of the aggregate margin debt is coming from, not just individual investors.

Historic levels of margin debt

Ugh. I was against the fed lowering the rates, because I don't believe people who assume risk should be bailed out whenever things go south. And I didn't really understand why the fed thought it important to do so today.

I still believe that, however I just read a statistic that concerns folks quite a bit. Right now aggregate margin debt as a proportion to market capitalization is at a historic high. Higher than 1929, higher than 1999-2000, higher than 1987.

Markets crash because of snowball effects, either runs on bank funds, or spiralling stock prices due to lack of buyers, or lack of liquidity from avoidance of all loan risk.

Apparently people have been taking out home equity loans or refinancing mortgages to adjustable rates and investing them in the stock markets.

The first test is going to be in September when adjustable rates on most mortgages are going to go up by 30%. If people are forced to sell stocks to make payments on their mortgages, or feel that they need to cut spending elsewhere to pay their higher mortgages, stocks will go down even more than this August. Right now, people are predicting the future, and trying to get out now, which is why stocks have crashed.

So the question is, will we see a real recession like in 2001-2003? Will this snowball take out so much with it that it depresses the global economy like 1929?

I think Bernanke's vacation's over, and he's going to have his hands full over the next 9 months. But I also think it's one of the best teams ever in charge of the fed, and they'll do everything possible to smooth out any large downswings.

http://www.discursivemonologue.com/2007/07/17/nyse-member-margin-debt-at-all-time-highs-in-both-real-and-nominal-values/

Check out this Time article from 1999 talking about the same thing. They said there could be a huge stock crash...

http://www.time.com/time/magazine/article/0,9171,991852,00.html

Hedge Funds, Subprimes, Bear Stearns and you

Talk about an interesting week. I was wrong, Bernanke and the Federal Reserve did have to intervene, although not by dropping rates. They injected 34 billion in 3 day notes into the market to weather the liquidity crisis. The emergency move can't be repeated indefinitely though, and they may have to act even before the next scheduled meeting to drop rates, even by 50 basis points.

So the artificial credit bubble that's been shoring up the consumer economy is bursting, but I'm betting Bernanke can give a reasonably soft landing. If not, you're going to see 1987 (stock crash) or 1998 (financial panic) analogue in this market.

I think Ketchup is doing some day trading on volatility, and now's a good time to get back in, at least for 1-3 weeks. I sold all my stocks last week and this week before the drop, and I'm short selling retail, financial, and discretionary goods because consumer buying power and confidence are going to nosedive in the next 12 months.

Strap on your helmets, going to be some volatility

I spent the last week moving out of the stock market into cash positions. There's a good chance this is the beginnings of a bear market and/or recession if the subprime crash spreads to other areas. Basically, easy money and incorrect risk assessments have propped up the economy for a while now, and it's starting to unravel. You can see my earlier post for a good review of the problem facing Bernanke right now, who's been doing a great job.

http://biz.yahoo.com/ap/070809/wall_street.html?.v=49

Stocks Fall on Rising Credit Anxiety

A move by the European Central Bank to provide more cash to money markets intensified Wall Street's angst. Although the bank's loan of more than $130 billion in overnight funds to banks at a low rate of 4 percent was intended to calm investors, Wall Street saw the step as confirmation of the credit markets' problems. It was the ECB's biggest injection ever.


The Federal Reserve added a larger-than-normal $24 billion in temporary reserves to the U.S. banking system.

The ECB's injection of money into the system is an unprecedented move, said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co., adding that it offers evidence that the problems in subprime lending are, in fact, spilling into the general economy.

"This is a mini-panic," he said. "All the things that had been denied up until this point are unraveling. On top of this, retail sales were mediocre, which shows that indeed, the housing collapse is affecting the consumer."

Hedge Funds, Subprimes, Bear Stearns and you

If you're willing to invest 20 minutes, this Charlie Rose video does a good job explaining the current subprime market effects upon the economy, the federal reserve, corporate debt, hedge funds and the irrelevancy of fed's rate changes, and the housing market.

http://www.charlierose.com/shows/2007/08/07/1/a-discussion-about-economics-and-the-credit-squeeze

I'll try and find an article that explains the effect of yuan revaluation and the tug of war between America and China. China's literally got 1 trillion dollars of America's securities, and they wield a considerable power over our economy.

The big question is, will the effects of the drying up of the derivative mortage packages be contained or how much spillage will there be into the housing market, the stock market, and the general economy.

I found it interesting that there's no more need for Greenspan's "put", the guarantee that he'd drop rates if the market tanked, because the hedge funds are more capitalized than the banks, and have the ability to snap up undervalued products, shoring up the bottom. Amazing.