Market Blunders

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jared

jared

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Jan 30, 2007
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With firms going under left and right over the past month I thought this was very interesting.

Today Merrilyn lynch basically going under and getting bailed out by Bank of America and then JP Morgan bailing out the other firm in July (or it might of been June).. things are getting pretty wild.

About the stupidest argument I have heard in the past week is people blaming the administration(s) - both Bush and even Clinton.

Realistically those firms pretty much killed themselves. The gov (Greenspan, and now Paulsen) tried to adjust the rates to compensate for their huge mistakes but they can only do so much.

I think it is funny people on CNN today people were literally running to the bank to pull out all their money. First of all I doubt (from seeing the type of people in line) all those people had over 100k in the bank. Secondly they are not helping the situation causing a virtual run on the bank taking out all their money.

IMHO, what happened is definitely a concern, but what did we think would happen when these firms were just handing out money left and right?? Even my roommate said when he got approve for his mortgage they approved him for twice the amount he felt he could realistically even handle. They literally screwed themselves.

A great article I read today was by Mark Cuban. I highly encourage you to read it to get a realistic view of what is happening.

http://www.blogmaverick.com/2008/09...owns-why-they-will-happen-again-and-again-an/

The list of CEOs who have walked away with huge severance packages is a long one. The problem however isnt how much they got paid.

There is zero downside to a CEO for taking chances beyond the embarassment of getting fired. Would you let someone fire and embarass you for a check for $20mm dollars ? So would CEOs.

Find me the one story where the headline is "CEO has to pay the company losses back for being an idiot ? " or " Risky moves cost CEO his lifetime savings" or "Hedge fund manager gives back bonuses and exits with $1500 dollars a month severance"
Click to expand...
Too sum up the article, Cuban argues that the firm's CEOs took risks that were way out of their league. The most obvious is they have literally been giving out hordes of money (well loans anyways) to anyone with a pulse.

Lastly Jim Cramer, who many people write off as kinda a crazy guy called this out a fairly long time ago. This video clip is from the beginning of the summer and it is almost scary how he predicted the situation we are in.

[youtube]I1eSlYtXiro[/youtube]

Anyways, so I don't necessarily think its a good thing (obviously) that these firms are croaking (seeing that DOW took a 500 point hit today - highest since 2001), but realistically it seems to me it was bound to happen due to their own actions.

Maybe the ones that are still kicking, dare I say going strong, will clean their act up and turn things around for all of us.

Cheers
 
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Moral Hazard

jared said:
Realistically those firms pretty much killed themselves. The gov (Greenspan, and now Paulsen) tried to adjust the rates to compensate for their huge mistakes but they can only do so much.

IMHO, what happened is definitely a concern, but what did we think would happen when these firms were just handing out money left and right?? Even my roommate said when he got approve for his mortgage they approved him for twice the amount he felt he could realistically even handle. They literally screwed themselves.

Too sum up the article, Cuban argues that the firms CEO too risks that were way out of their league. The most obvious is they have literally been giving out hordes of money (well loans anyways) to anyone with a pulse.

Anyways, so I don't necessarily think its a good thing (obviously) that these firms are croaking (seeing that DOW took a 500 point hit today - highest since 2001), but realistically it seems to me it was bound to happen due to their own actions.
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Yup, you are correct. It was bound to happen.

The term for this is Moral Hazard.

http://en.wikipedia.org/wiki/Moral_hazard

It's going to be happening more now, because the government has stepped in several times to bail out the situation to "save" our economy. This means that others in the future will be willing to risk huge bad decisions knowing that the government will step in to save the day.

What if, every time a florist sent out bad flowers on a wire order, they would always make a profit (because they use the cheapest poorest quality of product, with lack of skill) because if there was a complaint, the wire service would cover their butt and issue a refund to the customer, but they get to keep the money either way..... well wouldn't they stop caring about the quality that they send out?

Oh, wait. That does happen right now. Never mind.

Anyway, that's Moral Hazard. Your incentive to analyze risk properly is removed by someone else covering the downside.
 
Very good comments, Guys. They certainly apply to more than just the current financial situation.
 
Cramer :yourock:

I love that guy! And he's right...!

We are at but the tip of the iceberg and we are headed for a melt down all the way to the creek...

I'm thankful I'm no longer in the market... I'd probably go back to drinking...:drunk:
 
Doesn't surprise me in the least Jared. People in business who have no moral convistions about what they should or should not be doing. UGH!
 
Well the Dow settled in at 9447.11 yesterday, on another 500 point loss.

This morning, before the markets are even awake, the Fed dropped the key interest rate by 1/2 point, to 1.5%, going rate 3%, followed immediately in London by a similar move.

Dow Futures are up in early trading this morning, and the market will likely gain today on the interest rate news, but IMO it will be a false rise, and will be unsustainable over the long run.

Exchanges in Tokyo, London and Germany are all off today, the Nekki in Tokoyo is off nearly 10%...

Dig in and dig deep...this is going to get serious now.
 
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Jared:

I respect your skills & your knowledge, but this is one area that your "youth" is really showing up. I get the feeling that the American History class, studing the Great Depression and the First Stock market collapse, were not part of your education.

People were running to the banks, and pulling out their money BECAUSE THEY REMEMBER WHAT IT WAS LIKE WHEN THE BANKS COLLAPSED, AND THEY COULDN'T GET THEIR HARD-EARNED MONEY OUT. AND WHEN THEY DID, THEY WERE GIVEN CENTS ON A DOLLAR.

People lost their houses, because they lost their jobs, and their life savings. When this was all gone, they jumped off the bridge, or the nearest building because they thought they their families could at least collect on a small life insurance policy. (they were generally wrong, because suicide was & usually is not a payable death claim).

OUT OF THIS PREVIOUS MESS CAME: FDIC insurance for your money in the bank. Expanded welfare banefits, including cash payments, to help those in need. The beginnings of Truth in Lending laws, so that people were informed about what they were borrowing, and interest rates, etc.

You, my dear young friend, have never had to live thru very tough economic uncertainty. My Grandma & Grandpa did, as did my Mom & Dad. These are two generations that have attempted to teach all of us to be frugal, to save, to invest cautiously, to have a "rainy day" fund squirreled away, to live within our means, and most importantly...to not trust the bankers or the government!!

These two generations put kids thru college by working 2 & 3 jobs....not by borrowing loads of money. they did not eat out 5 nights a week. A new sofa or TV was really exciting....and it happened about every 12 to 15 or so years. Cars were saved for and bought (sometimes on credit), and were kept for 7 to 10 years before they were traded in, or handed down.

The people you saw on TV aREMEMBER how bad it was the first time.....and want to be a little ahead of the curve this time. and by the way, how is someone supposed to look (in your opinion) when they are going to collect their life savings at the bank??? An old Italian gentlemen regularly visits my store, and we know that he is well off. If you saw him at the bank, you would think he is a bum. He would be one of the one withdrawing his over $100,000 from his account, and again from his wife's and his sisters and his daughters accounts.
Judge not a man by the clothes he wears......

Kind regards....and get off the internet and go get a history book,

Cheryl
 
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BOSS said:
Well the Dow settled in at 9447.11 yesterday, on another 500 point loss.

This morning, before the markets are even awake, the Fed dropped the key interest rate by 1/2 point, to 1.5%, going rate 3%, followed immediately in London by a similar move.
Click to expand...

I'm gonna ask a dumb question here cuz I really don't understand much of this and I really don't know.

Does this mean its a good time to refinance your house?
 
JB:
You could attempt to refinance your house, and would get a better rate....only if your credit rate is ABSOLUTELY STERLING OR GOLD.

Good banks are being very cautious these days, because they do not want to be the next to fall by the wayside.

If you have a good rate already, I'd hold. (Just MHO).

and thanks!

Cheryl
 
Excuse me d oany of you know where to sign up for these 700 million dollar bail out's?

I would like to apply. Since things are SOooooo crazy I fell I should apply for one for myself personally and one for the shop, also one for each of my dogs, one for the fish, one for my pee'd on mum's.

So where is it I apply????

If this nation is going crazy I am going to get on the crazy train (me and Ozzy)
 
Bloomz, what you could do is quit making payments for a couple of months, and then apply for some of the bailout money. Seriously, it's probably not a great time to refi. Theoretically, the rates would be lower, but they are being so cautious that you probably wouldn't save much. However, if you don't mind a little risk, and have a little cash, this is a great time to invest in the stock of a solid company. Most companies will come out of this, although it will take a few years. That's why Buffet, B of A, Wells Fargo and other companies with money are taking advantage of the situation.

One more thing. I read some really good advice today for small business owners, although it is probably what they call a BGO (Blinding glimpse of the Obvious). Cut costs as much as possible right now. Hoard your cash because you're going to need it. Think about accessing any lines of credit that you may need in the near future, and focus on short term revenue generators until things pick up a bit.
 
bloomz said:
I'm gonna ask a dumb question here cuz I really don't understand much of this and I really don't know.

Does this mean its a good time to refinance your house?
Click to expand...

JB,
Fed funds rate (or Feds interest rate ) is the interest rate that banks (or lending institutions) charge other banks (thru the Federal Reserve) to borrow overnite funds to meet their reserve requirement (usually 10% of their demand accounts)...50 basis points means .5%

When a bank issues a loan to a consumer, it transfers this money to a demand account and reduces the bank's reserves. If the banks reserve level falls below the legally required minimum, the bank must borrow money for it's reserves to remain compliant with Federal Reserve regulations. The bank can borrow the funds from another bank that has a surplus in its account with the Fed.

Changes in the fed funds rate influences the borrowing cost of banks in the overnight lending market, and subsequently the returns offered on bank deposit products such as certificates of deposit, savings accounts, and money market accounts. Changes in the fed funds rate and the discount rate also dictate changes in the Wall Street Journal Prime Rate...

For your Home Loans, you need to watch the prime rate...

The prime rate is the index for most credit cards, home equity loans and lines of credit, auto loans, and personal loans...Many small business loans are also indexed to the Prime rate...

.
 
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