so here we go again a 9.4% drop on Nikkei this wednesday 8th Oct 2008, triggered by previous days drop of Dow by more than 5.1%, and now the European markets responded with multiple percent drops in the first trading hours :-)
I think it's obvious that we are now in a panic more than in just an economic crisis. All the drops on world markets propagate like a chain reaction with moves that are theoretically extremely unlikely (given standard capital market theory), and all this is still happening even with the various government rescue plans beeing anounced.
Today UK government unveiled their rescue plan, which compared to the US is tiny but clearly better. Even then the FTSE-100 fell with more than 90 constituents showing a drop in price!!
Wednesday, October 8, 2008
Monday, October 6, 2008
7.85% - the market's going down baby!
So what's up with that, a hundred year move is occuring a couple of times every two week these days. I mean given the current volatility, we can pretty much throw most of EMH out of the window. It ought to be understood that moves like this certainly violate any sense of Normal density distribution of returns.
Lets face it EMH is a crappy, oops, sorry lets use other words here... mhmm, incomplete model of financial markets. Maybe we should give a chance to FMH, AMH, or George Soros' Reflexivity Theory!!
Lets face it EMH is a crappy, oops, sorry lets use other words here... mhmm, incomplete model of financial markets. Maybe we should give a chance to FMH, AMH, or George Soros' Reflexivity Theory!!
Saturday, October 4, 2008
George Soros
I wanted to mention this gentleman for a while. He's best well known as the man who broke the Bank of England. His Quantum fund was behind the huge short selling of British Pound on the 16th September 1992, that brought it onto its knees.
Other than that instead of me repeating information that is already out there, definitely check out wikipedia article or much better the numerous books he wrote. In short, Soros is a philantroper, phylosopher and a successfull fund investor.
What I like about this guy are his thoughtfull insides into current issues. He's also a man who is not scared to stand up for the right thing he believes into. Soros also acknowledges that he can be wrong and doesn't make an issue of it but accepts the world as it is, that it is full of biased opinions.
Check out some of his interviews available online:
Other than that instead of me repeating information that is already out there, definitely check out wikipedia article or much better the numerous books he wrote. In short, Soros is a philantroper, phylosopher and a successfull fund investor.
What I like about this guy are his thoughtfull insides into current issues. He's also a man who is not scared to stand up for the right thing he believes into. Soros also acknowledges that he can be wrong and doesn't make an issue of it but accepts the world as it is, that it is full of biased opinions.
Check out some of his interviews available online:
Friday, October 3, 2008
Rescue Bill passed!
I was just reading an article about Alternative solutions to the currently discussed $700 rescue bill when I checked the news to find the House has passed it. http://biz.yahoo.com/ap/081003/financial_meltdown.html
As I was reading I started to be more convinced that the bill isn't a fair solution and may have many implementation problems. I think Nouriel Roubini's quote summs up nicely, the feelings of so many people who opposed this bill:
It is pathetic that Congress did not consult any of the many professional economists that have presented – many on the Monitor Finance blog forum – alternative plans that were more fair and efficient. This is again a case of privatising the gains and socialising the losses; a bail-out and socialism for the rich, the well-connected and Wall Street. And it is a scandal that even Congressional Democrats have fallen for this treasury scam that does little to help millions of distressed, debt-saddled home-owners."
As I was reading I started to be more convinced that the bill isn't a fair solution and may have many implementation problems. I think Nouriel Roubini's quote summs up nicely, the feelings of so many people who opposed this bill:
It is pathetic that Congress did not consult any of the many professional economists that have presented – many on the Monitor Finance blog forum – alternative plans that were more fair and efficient. This is again a case of privatising the gains and socialising the losses; a bail-out and socialism for the rich, the well-connected and Wall Street. And it is a scandal that even Congressional Democrats have fallen for this treasury scam that does little to help millions of distressed, debt-saddled home-owners."
or maybe "yes" after all???
Friday 3rd October 2008 - the House of Representatives of United States Congress is to vote on an ammended version of the $700bn rescue package.
The ammended version still consists of a $700bn made available to the Secretary of Treasury for buying out the troubled Mortgage backed Securities, however the package now also includes $100bn worth of tax breaks and increased government's guarantee on savings from $100,000 to $250,000.
Only on monday the initial version of the rescue package has been declined by the House however later this week a slightly changed version of it has passed the Senate and now needs final approval by the House. Check out how the Senate and House of Representatives work - http://en.wikipedia.org/wiki/Concurrent_majority
It is now 6:30 Greenwich time and the House should be voting soon on the "Emergency Economic Stabilization Act of 2008", the expectations are very high and markets have been extremely volatile this week. FTSE-100 incrased by over 2% in the last trading hours and the Dow Jones is up by 2.80%
An open letter to the congressed endorsed by over 200 economists pointed out the pitfalls of the current rescue plans [see: http://freakonomics.blogs.nytimes.com/2008/09/23/economists-on-the-bailout/]
I am doubtfull the rescue package will pass, however there is a lot at stake for some high-profile characters and only a couple votes are needed to shift the cards around...
The ammended version still consists of a $700bn made available to the Secretary of Treasury for buying out the troubled Mortgage backed Securities, however the package now also includes $100bn worth of tax breaks and increased government's guarantee on savings from $100,000 to $250,000.
- http://biz.yahoo.com/ap/081003/wall_street.html
- http://news.bbc.co.uk/1/hi/world/americas/7649822.stm
Only on monday the initial version of the rescue package has been declined by the House however later this week a slightly changed version of it has passed the Senate and now needs final approval by the House. Check out how the Senate and House of Representatives work - http://en.wikipedia.org/wiki/Concurrent_majority
It is now 6:30 Greenwich time and the House should be voting soon on the "Emergency Economic Stabilization Act of 2008", the expectations are very high and markets have been extremely volatile this week. FTSE-100 incrased by over 2% in the last trading hours and the Dow Jones is up by 2.80%
An open letter to the congressed endorsed by over 200 economists pointed out the pitfalls of the current rescue plans [see: http://freakonomics.blogs.nytimes.com/2008/09/23/economists-on-the-bailout/]
I am doubtfull the rescue package will pass, however there is a lot at stake for some high-profile characters and only a couple votes are needed to shift the cards around...
Tuesday, September 30, 2008
So no approval, hmm...
Rescue package didn't gain congressional backing. There was always the possibility of this happening, the rescue package of $700b announced on 19th September has failed to get approval by lawmakers. The effect was a fall of UK's FTSE 100 index by 3% before recovering to rise to 0.3% by later morning hours. Biggest losers was the banking sector in the UK, with HBOS down 10% and Royal Bank of Scotland 10% lower. Relevant articles can be found on http://news.bbc.co.uk/1/hi/business/7643441.stm and http://biz.yahoo.com/ap/080930/wall_street.html.
- Dow Jones fell on Monday 29th by 6.98% (777.68 points) one of the largest one day drops ever
- In the UK, FTSE 100 fell by 3% early morning but recovered quickly. Hopes in Europe are still strong on getting a rescue package approved soon.
Tuesday, September 23, 2008
THOROUGHLY understanding the crisis
Today I've received my regular research newsletter from NBER (National Bureau of Economic Research). Among the working papers I came accross a nice in-depth analysis of the subprime crisis, and the underlying products and system that can be blamed for the current crisis.
I have to warn all u keen and interested readers out there - the paper is a good 90 pages long :-P. Here it is:
http://papers.nber.org/papers/w14358 - The Panic of 2007 by Gary B. Gorton.
I have to warn all u keen and interested readers out there - the paper is a good 90 pages long :-P. Here it is:
http://papers.nber.org/papers/w14358 - The Panic of 2007 by Gary B. Gorton.
Monday, September 22, 2008
REASONS for this crisis
As a follow up to my previous blog post, I would like you to understand the system behind bad loans that has brought so many companies into turmoil recently. I found a number of videos by khanacademy on youtube, that do a pretty good job at summarising the subprime crisis.
- http://uk.youtube.com/watch?v=oosYQHq2hwE&feature=related
- http://uk.youtube.com/watch?v=eYBlfxGIk28&feature=related
- http://uk.youtube.com/watch?v=q0oSKmC3Mfc&feature=related
- http://uk.youtube.com/watch?v=XjoJ9UF2hqg&feature=related
- http://uk.youtube.com/watch?v=8IR5LefXVPY&feature=related
- http://uk.youtube.com/watch?v=wYAhlTHIBT4&NR=1
- http://uk.youtube.com/watch?v=aAfMps_VyOY&feature=related
- http://uk.youtube.com/watch?v=s6UYa2nwaDw&feature=related
Sunday, September 21, 2008
FTSE-100 & 19th September
Wow, the current stock-markets are serriously volatile!
The 19th Sept 2008 (last Friday) has seen an 8% rise on the FTSE-100. The biggest rise since its inception on 3 January 1984. This was the reaction to US, Bush backed plan to pump $700bn into the markets http://news.bbc.co.uk/1/hi/business/7628144.stm. Even thought this plan still needs congress approval (which it is expected to get next week, before the pre-election break commences), it has immediately spurred immense optimisim within investor circles.
A 700bn fund that promises to buy out a lot of bad loans and CMOs, CDOs, ... is a pretty hefty rescue package. It is a real strategy / plan rather than tactical ad-hoc case based interventions that we have seen up to this point.
A couple links to nice educational videos about the products behind the mortgage/debt crisis are below:
The 19th Sept 2008 (last Friday) has seen an 8% rise on the FTSE-100. The biggest rise since its inception on 3 January 1984. This was the reaction to US, Bush backed plan to pump $700bn into the markets http://news.bbc.co.uk/1/hi/business/7628144.stm. Even thought this plan still needs congress approval (which it is expected to get next week, before the pre-election break commences), it has immediately spurred immense optimisim within investor circles.
A 700bn fund that promises to buy out a lot of bad loans and CMOs, CDOs, ... is a pretty hefty rescue package. It is a real strategy / plan rather than tactical ad-hoc case based interventions that we have seen up to this point.
A couple links to nice educational videos about the products behind the mortgage/debt crisis are below:
- Mortgage Backed Securities - http://www.youtube.com/watch?v=DHLcD405VsI&feature=related
- Structured Securities - http://www.youtube.com/watch?v=-Ycjn8xzszA&feature=related
- Asset Backed Securities - http://www.youtube.com/watch?v=3_pRi0BThJM&feature=related
Tuesday, September 16, 2008
Lehman, Fannie and Freddie
Wow!! Yesterday (Monday 15th Sept 2008) the FTSE-100 fell from Fridays' closing price 5,416.70 to 5,204.20, nearly a 4% drop in a day, some markets falling even harder. So what can we identify as a reason for the drop. Well, the fourth largest investment bank - Lehman Brothers has filed for bancrupcy, Meryll Lynch is getting ready for a takeover and AIG has some problems too. However all this didn't come quite too unexpected. We were in huge trouble since the Subprime crises erupted 14 months ago. What we've seen since then, was a lot of patching and quick-fixing. Banks, such as Bear Sterns or Northern Rock among others being rescued, inflation targets beeing ignored for the price of cheap cash and the highly controversial rescue of Mortgage Giants Freddie and Fennie Mac http://news.bbc.co.uk/1/hi/business/7603946.stm.
The problem with pumping money into these companies are numerous-fold. First off, tax-payers are paying for something they should not be be paying for in a fair economy. The system is shaken up already, consumer confidence is very, very low!! Nobody knows how much more real estate will fall, people are more likely then ever to put off home buying in the current climate. Another real problem, when the government steps in to rescue a private financial firm it encourages other firms to engage in risky behaviour too [see http://biz.yahoo.com/ap/080915/paulson_markets.html].
Most people knew a time would come when the patching becomes unbearable. Untill now all that was done was simply putting off of a crisis further back that cannot be avoided anyway. Jim Rodgers explains this nicely in his August 2008 interview for CNBC:
Jim Rodgers - CNBC video (August interview)
http://www.cnbc.com/id/15840232?video=835801384
Even the biggest of the biggest Bulls now see that we are going into a pretty hard recession. A recession always happens in one of two possible ways:
The problem with pumping money into these companies are numerous-fold. First off, tax-payers are paying for something they should not be be paying for in a fair economy. The system is shaken up already, consumer confidence is very, very low!! Nobody knows how much more real estate will fall, people are more likely then ever to put off home buying in the current climate. Another real problem, when the government steps in to rescue a private financial firm it encourages other firms to engage in risky behaviour too [see http://biz.yahoo.com/ap/080915/paulson_markets.html].
Most people knew a time would come when the patching becomes unbearable. Untill now all that was done was simply putting off of a crisis further back that cannot be avoided anyway. Jim Rodgers explains this nicely in his August 2008 interview for CNBC:
Jim Rodgers - CNBC video (August interview)
http://www.cnbc.com/id/15840232?video=835801384
Even the biggest of the biggest Bulls now see that we are going into a pretty hard recession. A recession always happens in one of two possible ways:
- Markets fall hard and painfully, but the recession tends to be shorter
- A crisis is put off by government intervention for so long, that when eventually a recession happens it takes much longer for it to come to an end.
The second point is obvious if one thinks about the idea a little bit. There is something inevitable about rescuing badly managed businesses, were management was incapable of adapting to shrinkage in consumer spending and minimising loses responsibly. In situations such as these, responsible companies survive and the badly managed ones will not. In a democratic society maybe we shouldn't let them. Anybody can do well in a healthy economy, however when hard times come around, the bad ones need to go and they eventually will. The question is how long it will take for them to go away; long vs. short recession?!?!
For those on the left side of political spectrum I will say only this, I am too, but saving badly managed businesses is not right, not right, not in a free economy! We should have and many countries (not all) do have enough social nets to take care of people who lose their livelihoods.
To Conclude
There are three things I would like to conjure from this little Tuesday post :-)
- In capitalistic economy we should be socially responsible to people, however not to badly managed businesses even if they are in a recession. There is no reason we should all pay for mistakes and incompetences of a small group of people.
- Recessions are inevitable in the free markets.
- We are currently in a very recessive economic environment, and I am certainly bearish on the UK stock market and I have been for a while. That does not mean there are no mid-term opportunities, what it means is that short selling is now the way to go!!
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