Has the financial crisis turned the corner?

[Jakub]

Wall Street is exuberant today, particularly in the financial sector. No doubt there will be some more fallout ahead, but would you think the panic mood has calmed?

[Andrew Mayer]

Everything's fine as long as Bernake can keep lowering the interest rate.

He can do that forever, right?

Seriously though, the problem is that no one knows how deep the crisis really goes, or how much bad paper is out there. But we are nowhere near the bottom.

[Jakub]

Oh hell, I didn't notice the rate cut.

Screw it, Bernanke's just digging a deeper hole.

[The Other Guy]

My entirely naive analogy for the stock market is--since so much of it is based on perception of value affecting actual value--an acid trip. Sooner or later, the bad part of the trip kicks in and everyone loses their shit unless someone with experience and a cool head talks everyone out of it. And even then, people can still lose their shit and end up, uh, losing their shit.

Sometimes I wish I could invest my 401(k) in Magic: The Gathering cards, instead.

[Grifman]

It hasn't turned the corner because no one even knows where the corner is.

[SlyFrog]

Everything's fine as long as Bernake can keep lowering the interest rate.

He can do that forever, right?

How about we just trust that one of the leading scholars of financial system crises and what they do to an economy and how important it is to prevent them -- a certain Ben Bernanke -- might just know what's he doing.

[VegasRobb]

Well the rate is down to 2 1/4.

[Miramon]

Well the rate is down to 2 1/4.

Hey this is the perfect time for a first time home owner to get in on an ARM with a balloon!

[jeffd]

How about we just trust that one of the leading scholars of financial system crises and what they do to an economy and how important it is to prevent them -- a certain Ben Bernanke -- might just know what's he doing.

You do realize that Bernanke knowing what he's doing doesn't preclude him just not having enough room to work with, right?

[Aeon221]

You do realize that Bernanke knowing what he's doing doesn't preclude him just not having enough room to work with, right?

http://www.quartertothree.com/game-talk/showpost.php?p=1285874&postcount=132

You've been snarked!

[jeffd]

As pointed out above - no one knows where the corner is.

I'd like to point out that the market being up 420 isn't a sign of anything other than panicky investors who have absolutely no idea what's happening. I don't think the market is at all rational right now.

[Brandon Clements]

How about we just trust that one of the leading scholars of financial system crises and what they do to an economy and how important it is to prevent them -- a certain Ben Bernanke -- might just know what's he doing.
He's definatly shooting with both barrels now that they've (the Fed) opened up liquidity to IB's (and doing that a week ago would have probably saved BSC), but how much ammo do they have, and how low are they willing to shoot? Are they willing to kneecap the dollar to do this?

Getting away from bad analogies, Bernake's papers on this (I don't have a link, sorry) are pretty approachable from a college-level-econ perspective, but I can't tell if he's fighting the last war now. My gut feeling is that this isn't just a liquidity problem, it's a solvency problem; I.E. it's not just what you've got in your cash account, it's a what's on the books and how much is it really worth problem. It's in no one's interest to have the CDS portfolio that BSC held to be actually valued. Helping JPM buy BSC and keep them out of bankrupcy (and they probably weren't going into it, not with bonuses being despensed at the beginning of the month) kept the mark-to-market for a lot of CDS from happening, but I think you're seeing the lower limit of the Fed's reaction here. Thornburg (ultra prime jumbo mortgage lender) can fail, but big CDS counterparties like BSC are going to be matched up (with corporations like JPM) and bought, with help from the Fed. Valuing that stuff in a weekend probably isn't possible (and wasn't possible by JPM), and with a warranty from the Fed and that you're buying the counterparty to your risk...

Is that going to be enough? Hell if I know. What I think is that the Fed has probably set the lower bound. Are they going to have the ammo to help the upper bound?

[Jasper]

How about we just trust that one of the leading scholars of financial system crises and what they do to an economy and how important it is to prevent them -- a certain Ben Bernanke -- might just know what's he doing.
Heh, nice one Sly.

[Matthew Gallant]

Hey this is the perfect time for a first time home owner to get in on an ARM with a balloon!
http://www.yuppiepunk.org/images/lucas-slow-clap.jpg

[Rimbo]

Sometimes I wish I could invest my 401(k) in Magic: The Gathering cards, instead.

Uhm...

So the basic investor's creed is: Buy low, sell high. The stock market is low. Thus, one should be buying. If it goes lower, then one should be buying more.

[Sarkus]

Paul Volker was on Charlie Rose tonight and he didn't seem particularly worried. Maybe he doesn't know all the details, but most of the "sky is falling" folks I've heard have been saying that for years and predicting a new depression was right around the corner. Maybe this time they're right, but I'd rather wait and see how things develop myself.

Then again, I have nothing directly at stake.

[Chris Nahr]

As my good friend Cleve recently asked on his fine blog, what's the interest rate cut after 0.1?

The sheer amount of incompetence and mendacity among managers of major banks that has come to light during this crisis is just staggering. Right now it's not possible to assume anything about the true extent of bad loans. Bernanke just crosses his fingers and hopes the crisis will be over before he runs out of interest rates to cut. Whether that will happen is anyone's guess.

Then again, I have nothing directly at stake.

So you don't buy or sell any products at market prices, you don't have any cash accounts, you don't need any credit, and you don't work for any company that might need credit or investment capital? How's the bartering going among subsistence farmers these days? :)

[Sarkus]

So you don't buy or sell any products at market prices, you don't have any cash accounts, you don't need any credit, and you don't work for any company that might need credit or investment capital? How's the bartering going among subsistence farmers these days? :)

I said "directly" and I meant it. When you are not working and have minimal income and assets, you look at these things differently. :-)

My real concern is more about family and friends.

[Fooey]

The Primary Dealer Credit Facility the Fed introduced Sunday night was really important. It makes another failure like Bear's pretty much impossible. There's still going to be a recession, but systemic risk has greatly decreased.

[WarrenM]

Uhm...

So the basic investor's creed is: Buy low, sell high. The stock market is low. Thus, one should be buying. If it goes lower, then one should be buying more.
Yep. I'll never understand why the rats flee the ship at the first sign of trouble. Don't you want cheap stock? Would you prefer to keep buying high forever? Makes no sense.

[deccan]

Yep. I'll never understand why the rats flee the ship at the first sign of trouble. Don't you want cheap stock? Would you prefer to keep buying high forever? Makes no sense.

Because no one wants to catch a falling knife by the blade. You never know when the market's hit bottom, nor how long it might take to go back up again. Just look at Japan.

[WarrenM]

So because Japan sucked you shouldn't buy stock and, worse yet, sell what you currently own? That's nonsense.

[Kraaze]

So because Japan sucked you shouldn't buy stock and, worse yet, sell what you currently own? That's nonsense.

Selling what one owns and refusing to buy more are both perfectly rational positions if one believes the market is moving downward but still has a long way downward to go.

The fact that individuals, even professional traders, aren't horribly good at figuring out where the bottom is means that usually we see this behavior right at the bottom too.

[WarrenM]

Selling what one owns and refusing to buy more are both perfectly rational positions if one believes the market is moving downward but still has a long way downward to go.
Well, that's called market timing and it's generally accepted to be a bad strategy.

[Kraaze]

Well, that's called market timing and it's generally accepted to be a bad strategy.

I know. Lots of people do it anyway.

[WarrenM]

I know. Lots of people do it anyway.
Then how can you call it a perfectly rational position? You just said that you know it's a bad stategy.

[Kraaze]

Then how can you call it a perfectly rational position? You just said that you know it's a bad stategy.

Sorry, I could have phrased that better. How about perfectly rational to those who think they do have a handle on which way the market is moving.

I'm not trying to defend this idea, btw. I'm just saying that historically, this is definitely what happens in a big market drop.

[WarrenM]

I agree that it happens. I guess we agree. Damn you!

[Robert Sharp]

The market is never rational anyway. That's a terrible standard.

I think the market will turn around because I am a positive person! Yay!

[Kraaze]

The market is never rational anyway. That's a terrible standard.

I think the market will turn around because I am a positive person! Yay!

And if everyone agreed, you'd be right!

[Andrew Mayer]

The market is never rational anyway. That's a terrible standard.

The market is irrational in the short term, but rational in the long term.

But ultimately it's nonsense to think that anyone knows where the "bottom" is.
Things are going to get worse if there's no credit available, and the big institutions are still in trouble.

[Andrew Mayer]

Wall Street is exuberant today, particularly in the financial sector. No doubt there will be some more fallout ahead, but would you think the panic mood has calmed?

What do you think about this statement in light of todays losses?

[jfletch]

What would be going on now if we turned our social security money over to these incompetent buffoons?

My gut feeling is that this isn't just a liquidity problem, it's a solvency problem; I.E. it's not just what you've got in your cash account, it's a what's on the books and how much is it really worth problem.

Yea, I think it is pretty obvious that is the major problem. If BSC went bankrupt and their assets were sold, then it would've been obvious that what they have ain't worth shit, and all the other stuff everybody else has ain't worth shit either. But for now, ignorance is bliss.

[deccan]

Well, that's called market timing and it's generally accepted to be a bad strategy.

Bad strategy or not, I wish I'd done some market timing of my own. This is about the Malaysian elections earlier this month. I predicted to myself that the opposition would win big and cause a market meltdown, but didn't act on it because, well, that would be market timing, and 'lo and behold, it came to pass.

[Huzurdaddi]

Well, that's called market timing and it's generally accepted to be a bad strategy.

Buying more stock is also market timing. The only way you are not attempting to time the market is to be buying regular amounts at regular intervals.

The price is the price is the price. Just because the price has gone down in the last 'n' sessions does not mean that it is more likely to go up, just as it does not mean it is more likely to go down.

[Zarathustra]

I keep thinking of Enron, how they based a large segment of their business on hubris, ego, and bad decisions and employed fraud to keep things going. The company was dead yet Key Lay was urging Enron employees to hold on to their stock while he was selling his. This kind of mindset seems to be rampant in the financial sector, and the public, those who were greedy and ambitous enough to cast caution aside and sign onto homes they could not afford and mortgages that seemed to good to be true (buy now, pay later), are equally culpable.

Trend the Dow Jones over the last six months. Is it a momentary downturn? Or merely the beginning of a major correction?

[shift6]

I would love to be able to claim credit for this, but no.

To the tune of Bohemian Rhapsody:

Is this the real price?
Is this just fantasy?
Financial landslide
No escape from reality

Open your eyes
And look at your buys and see.
I'm now a poor boy
High-yielding casualty

Because I bought it high,
watched it blow
Rating high,
value low

Any way the Fed goes
Doesn't really matter to me,
to me

Mama - just killed my fund
Quoted CDO's instead
Pulled the trigger, now it's dead
Mama - I had just begun
These CDO's have blown it all away

Mama - oooh
I still wanna buy
I sometimes wish I'd never left Goldman at all.

[guitar solo]

I see a little silhouette of a Fed
Bernanke! Bernanke! Can you save the whole market?
Monolines and munis - very very frightening me!
Super senior, super senior
Super senior CDO - magnifico

I'm long of subprime,
nobody loves me
He's long of subprime
CDO fantasy
Spare the margin call you monstrous PB!

Easy come easy go, will you let me go?
Peloton! No! We will not let you go - let him go!
Peloton! We will not let you go - let him go!
Peloton! We will not let you go - let me go!
Will not let you go - let me go!
Never let you go - let me go!
Never let me go - ooo

Oh mama mia, mama mia,
mama mia let me go
S&P had the devil put aside for me
For me, for me!

[crescendo]

So you think you can fund me and spit in my eye?
And then margin call me and leave me to die

Oh PB!
Can't do this to me PB
Just gotta get out
Just gotta get right outta here

[denoument]

Ooh yeah, ooh yeah
No price really matters
No liquidity
Nothing really matters...
No price really matters
to me

Any way the Fed goes...

edit: cleaned up goofy extra characters... sorry!

[Dave Markell]

Oh wow.

[Andrew Mayer]

[QUOTE=shift6;1287524

Any​ way​ the​ Fed​ goe​s
Doe​sn'​t rea​lly​ mat​ter​ to me,​
to me
[/QUOTE]

Here's how awesome I think that is: I wish I'd read it somewhere else so I could come post it here.

[MyNameIsWill]

What do you think about this statement in light of todays losses?
It says that one-day movements don't mean a whole lot. Wednesday's losses were pretty much recuperated on Thursday. This is significant, of course, because it makes Tuesday's rally look like it has legs.

[Jason McCullough]

As my good friend Cleve recently asked on his fine blog, what's the interest rate cut after 0.1?

Inflation targeting, actually. Krugman's written some interesting stuff on this and how Japan kind of tried it in the 1990s.

[Jakub]

What do you think about this statement in light of todays losses?
Again, I hadn't noticed the rate cut Bernanke had put in.

Consumer spending is DONE. The American economy needs a recession with which to reign in spending - consumer, state, and federal levels - before it can move on. There can be no more actually cheap credit from this point onwards.

Bernanke screwed up by not recognizing this.

Then again, I screwed up by not realizing the consequences of Greenspan's stupid rate cuts.

[Ranulf]

Great, now I have Bohemian Rhapsody stuck in my head.

I think the trick for me is to find the right time to buy a house and start investing in the market before the dollar crashes totally.

[Kraaze]

Good news at last (http://www.marketwatch.com/news/story/ex-countrywide-execs-form-firm-invest/story.aspx?guid=%7BE712A645%2DA840%2D4B80%2D98AB%2 DECF52453BA37%7D)

This is a sign I've been waiting for that things are starting to turn the corner. After all the doom and gloom the smart money players are starting to realize that the panic and emotion have left some mortgages undervalued. It would be a much better if the smart money was trying to buy up the CDOs and mortgage backed securities on the cheap, but I'll take what I can get.

[Huzurdaddi]

There is chatter that the fed will start to buy MSBs. Everyone knew that it would have to happen sooner or later, the financial markets were holding their breath like a 3 year old and the fed is going to give in.

Big Ben has been brilliant so far but the other shoe has to drop sooner or later.

BTW: I'm going to pull a hrose, I said this would happen (http://www.quartertothree.com/game-talk/showpost.php?p=1176480&postcount=26). Also I was right on every interest rate cut! Woot! Of course I really did not belive any of these prognostications since I put 0 dollars down on each one of them. I have been sitting on the same positions since January (sigh I'm a chump).

[Papageno]

Well, great, now they're proposing yet another taxpayer bailout of rich folks who got too greedy and took stupid risks. Hooray! We spend public money on all kinds of shit, but rarely on the stuff that really helps everyone, like universal health care coverage or a changeover to energy sources that don't make us fight trillion-dollar+ foreign wars.

[Kraaze]

Well, great, now they're proposing yet another taxpayer bailout of rich folks who got too greedy and took stupid risks. Hooray! We spend public money on all kinds of shit, but rarely on the stuff that really helps everyone, like universal health care coverage or a changeover to energy sources that don't make us fight trillion-dollar+ foreign wars.

This isn't a bailout of a few specific rich folks, it's a move to prop up the economy as a whole and Wall Street in specific. This benefits anyone with a 401k or a pension for starters, but still leaves Bear Sterns stockholders with a significant loss.

[MyNameIsWill]

Well, great, now they're proposing yet another taxpayer bailout of rich folks who got too greedy and took stupid risks. Hooray! We spend public money on all kinds of shit, but rarely on the stuff that really helps everyone, like universal health care coverage or a changeover to energy sources that don't make us fight trillion-dollar+ foreign wars.
By many accounts, the portfolio the Fed bought was accurately or under valued. All profits in the new deal accrue to the Fed, so it's likely taxpayers will benefit.

The old deal was a necessary bail-out though. The Fed assumed all losses and no up-side. In the new deal, it assumes losses only after the first $1 billion and all upside.

[Papageno]

[edit: this was in response to Kraaze's post--given MyNameIsWill's post maybe I'm wrong about the nature of the bailout]

That may be, but it still leaves the taxpayer holding a big bag of near-worthless paper, unless everyone who's having trouble/defaulting on those mortgages suddenly has his/her fairy godmother appear and grant him/her a million dollars.

I certainly hope that in exchange for this government largesse, the financial industry accepts that these exotic financial instruments, ever-more-abstracted from the real estate transactions they're ultimately based on, need limits put on them. There's no incentive for Joe Blow mortgage broker to actually ascertain whether someone is good for the money he's promised to pay back if the broker can make the numbers look good for just the next couple of months, and after that the mortgage has been sold and chopped up and resold a dozen times and then it's someone else's problem.

Back in the day, the bank/S&L/credit union HELD your mortgage, so they had a real interest in seeing that you had the income to make those payments. Now it's all about being a middleman and shifting responsibility/ownership to someone else as quickly as possible. That kind of bullshit is ruining the country.

[Old Man Gravy]

Huh. That was an odd bit of analysis.


Anyway, I know there are a couple pretty serious home gamers here and some of you who've passed your sevens. I don't know how many technical analysts we have, but here's a couple thoughts from a market poser. Plus charts for Zarathustra:

The Dow
http://img258.imageshack.us/img258/8392/033008djiagl4.png


The S&P
http://img404.imageshack.us/img404/1157/033008spxgs0.png

Just a couple quick items. I drew in lines that indicate momentum divergences between price action and moving average convergence graph. In retrospect, they look to me like pretty textbook double (or triple) tops from May-June-July last year, and they resolved nicely into that late summer bloodletting in both indices. Of course, retrospect is easy and that goes times a hundred in stock charts. I imagine qute a few market makers and pros made their careers optional by fading those setup tops.

The market started to jerk around when the news started coming heavy that there might be trouble in the market valuations of the assets collateralizing all the mortgage-backed investment vehicles, and it seems like I remember the huge selloffs in late October and early November coming around the big bank and financial institution earnings reports. Mostly because the earnings conference calls weren't so much about their earnings but rather about how many COMMAS there were in the figures representing their subprime write-offs. It seems like mid-January's waterfall declines were in response to earnings (for lack of a better word) reports, too.

So here's the thing I'm struggling with: I see what look like big-time bullish divergences that have been coiling for about the past six weeks - blue lines on the S&P chart and green on the DJIA. Look at how the EMA is tumbling and closing prices have recently successfully tested the January lows. MACD shows pretty significant shift in momentum, but the really interesting point to me is the way bear power is drying up as indicated by the force index graph. It all REALLY makes the January-to-March lows look like double bottoms.

The wildcard is earnings season, though. We're starting to see earnings reports, and some of 'em are okay (read: "not as bad as we thought") Earnings'll really get going here in the next few weeks. Who knows what we're going to see? We've had some decent reports about employment and orders for durable goods, and the big dry bulk shippers are swinging positive.

I like the technical setup, but I still think I'm going to close my positions in the next week and keep my head down until May.

[Midnight Son]

Technical analysis is as useful as reading tea leaves. IMHO.

Warren Buffett: "I realized technical analysis didn't work when I turned the charts upside down and didn't get a different answer"
"If past history was all there was to the game, the richest people would be librarians."

Peter Lynch: ""Charts are great for predicting the past."

[Lurb]

Yeah, in my totally non-qualified hunch technical analysis can't work, because if it worked, then it would inmediately stop working.

I used to see my brother in law fiddling with his charts and thought: "well he has a B.S in Economy and I don't so I guess I don't know shit, but I've dealt a lot with all kinds of graphs and charts in other fields and what he's doing reeks of magic, superstition and unscientific thinking". Then I read "A Random Walk through Wall Street" and saw my thoughts confirmed in pretty words.

Even if the markets aren't completely random, I'd say they are as good as random against counting peaks on a graph. Psychohistory is still a fictional science on a fine series of books.

[malphigian]

I used to see my brother in law fiddling with his charts and thought: "well he has a B.S in Economy and I don't so I guess I don't know shit, but I've dealt a lot with all kinds of graphs and charts in other fields and what he's doing reeks of magic, superstition and unscientific thinking". Then I read "A Random Walk through Wall Street" and saw my thoughts confirmed in pretty words.

Yeah. It's also telling that (last time I looked into it anyway) every attempt to confirm technical analysis with actual controlled study, it failed to be any better than random guesses.

It's pure tea leaf reading, but a shocking number of people seem to really believe it.

[Kraaze]

That may be, but it still leaves the taxpayer holding a big bag of near-worthless paper, unless everyone who's having trouble/defaulting on those mortgages suddenly has his/her fairy godmother appear and grant him/her a million dollars.


It's not near worthless, it's just probably not worth what the books of Bear Sterns said. I've heard various estimates floating around but the consensus seems to be in that 10%-20% loss on that paper is realistic. Ergo, we aren't spending 30b to bail out, we are spending 3-6b. The flipside of that is all these new short term lending facilities the fed rushed to create to stabilize things are reaping profit for the fed. These aren't no-interest loans that the fed is giving out, after all.

That's not to say that there isn't a cost, but it's a distributed cost that we are going to all pay in terms of lowered value of the dollar and lower returns economy wide due to low low interest rates.


I certainly hope that in exchange for this government largesse, the financial industry accepts that these exotic financial instruments, ever-more-abstracted from the real estate transactions they're ultimately based on, need limits put on them. There's no incentive for Joe Blow mortgage broker to actually ascertain whether someone is good for the money he's promised to pay back if the broker can make the numbers look good for just the next couple of months, and after that the mortgage has been sold and chopped up and resold a dozen times and then it's someone else's problem.

Back in the day, the bank/S&L/credit union HELD your mortgage, so they had a real interest in seeing that you had the income to make those payments. Now it's all about being a middleman and shifting responsibility/ownership to someone else as quickly as possible. That kind of bullshit is ruining the country.

Regulation of this kind of crap is inevitable now. Bailouts like this always come with them. The only remaining argument is the form and severity.

[Fooey]

The Fed's highly likely to make a profit on the Bear Stearns assets. They took the assets at marked to market levels. Mark to market prices for the relatively higher quality mortgage securities the Fed bought at this point imply default and recovery rates that are insanely high because all the forced liquidations and shorting to hedge positions as driven prices well below any reasonably measure of underlying value if like the Fed you can stand further mark to market losses and hold them to maturity.

[Kraaze]

How would one arrive at a mark to market valuation for these assets though? I thought that was part of the problem with these securites in the first place, that all attempts at valuing them ended up with a strong fantasy component?

I guess it would be interesting to see how the Fed's valuation of these assets matches up with how Bear Sterns had them valued last month or last year. I have no idea if that's do-able with publicly available info though.

[Old Man Gravy]

Well, I'm not here to evangelize for a particular set of trading tools, but I know people who are interested in markets hit these threads so I'll take a couple of these points on. It's always funny to me when guys who haven't done something say it can't be done, especially when you know guys who have done that exact thing.

Technical analysis is as useful as reading tea leaves. IMHO.

Warren Buffett: "I realized technical analysis didn't work when I turned the charts upside down and didn't get a different answer"
"If past history was all there was to the game, the richest people would be librarians."

Peter Lynch: ""Charts are great for predicting the past."

Peter Lynch and Warren Buffett are two of the greatest value investors of all time; you can't argue with their success. However, they are investors, not traders. Playing a completely different game. Asking a value investor about anything but fundamental analysis is like asking someone playing poker if they think doubling down when their cards total up to 10 is an effective tactic. Of course they'll tell you that's stupid, and it won't work. And they'll be right. Tools for blackjack are different than tools for poker, just like tools for trading are different than tools for investing.


I used to see my brother in law fiddling with his charts and thought: "well he has a B.S in Economy and I don't so I guess I don't know shit, but I've dealt a lot with all kinds of graphs and charts in other fields and what he's doing reeks of magic, superstition and unscientific thinking". Then I read "A Random Walk through Wall Street" and saw my thoughts confirmed in pretty words.


Wait, so - you had a preconceived notion and found a book whose title seemed to agree with your preconceived notion. And when you read it, you found out that the author's preconceived notion was the same as your preconceived notion and so you found out you were right all along? WOW I BET THAT'S NEVER HAPPENED BEFORE

Of all the theorists out there, the random market guys have to be some of the most inexperienced. It's true that a mathematically rigorous test of market data will demonstrate that a lot of the volume in the market is nothing but directionless crowd noise. But all you have to do is put on one position and have it go south on you and then start jerking around in the 15-20% loss range. Unless you're some kind of psychopath or ice-water-veined robot, you start to sweat. You hurt and you pray for it to rally so you can just get out even. The guys who sold short are hoping for a rally so they can increase their position at resistance and beat it down again. As soon as it ticks back up, everyone sells, pushing prices down.

Everyone who's traded has had this happen - it's endemic to human nature and is fairly predictable individual behavior that gives some shape to the normally aimless crowd-milling-around activity. In my opinion, it's most likely what causes the easily-identified support and resitance zones bordering trend and price channels. I don't know anything about psychohistory, but mob psychology is pretty well understood and predictable. As it does in so many areas of human endeavor, regret, with all its ugly power, blows gigantic holes in the random walk theory.

Again, I'm not here to evangelize for a trading method - which is actually the least important part of a successful investing business plan in my opinion. If you think technical analysis is bunk because some guys who never used it (or who tried once and failed and gave up) said it was, good on ya.

I just wanted to clear up what I think are some misconceptions since people who are interested in this type of thing gravitate to these threads.

[Kraaze]

I just wanted to clear up what I think are some misconceptions since people who are interested in this type of thing gravitate to these threads.

I'm certainly interested. Even if I'm by nature a little leery of technical analysis it's still interesting to read about and broaden my horizons. Don't get too hung up on dismissive naysayers who probably don't have a lot of experience with the subject matter. They are a fact of life in P&R on any topic ;-)

[Aeon221]

How would one arrive at a mark to market valuation for these assets though? I thought that was part of the problem with these securities in the first place, that all attempts at valuing them ended up with a strong fantasy component?


Banks are having to mark items down based on estimations of what the market price would be if they tried to sell it, generally based on models awash with not entirely applicable historical data. That's why its taking so long for this whole issue to be resolved, and why there have been multiple cycles of markdowns for individual banks.

[Phil_Stein]

Old Man Gravy, I assume you are advocating technical analysis for individual investors.

Can you point to any solid research supporting the concept that skilled individual technical investors typically outperform indexing, net of costs?

[Midnight Son]

Peter Lynch and Warren Buffett are two of the greatest value investors of all time; you can't argue with their success. However, they are investors, not traders. Playing a completely different game. Asking a value investor about anything but fundamental analysis is like asking someone playing poker if they think doubling down when their cards total up to 10 is an effective tactic. Of course they'll tell you that's stupid, and it won't work. And they'll be right. Tools for blackjack are different than tools for poker, just like tools for trading are different than tools for investing.


Good that you brought up gambling, because that's all it is. And even gamblers get lucky sometime.

[Kraaze]

Good that you brought up gambling, because that's all it is. And even gamblers get lucky sometime.

Well the odds are better than a casino for a sharp player, so that's something.

[Midnight Son]

Sez who?

[Kraaze]

Me.

45

[Midnight Son]

Ok, Le Chiffre.

[WarrenM]

Well the odds are better than a casino for a sharp player, so that's something.
AS Phil said, links please. Day traders, historically, have pretty bad track records.

[Fooey]

How would one arrive at a mark to market valuation for these assets though? I thought that was part of the problem with these securites in the first place, that all attempts at valuing them ended up with a strong fantasy component?

I guess it would be interesting to see how the Fed's valuation of these assets matches up with how Bear Sterns had them valued last month or last year. I have no idea if that's do-able with publicly available info though.

There a default swap market for subprime mortgages known as the ABX. Without much else to go on, it's become a major way for firms to mark their subprime exposure to market. Problem is, it's a thin market and it's also being used by these same companies to try to hedge their exposure to subprime assets by shorting it. This shorting drives the price down further, leads to further write downs, and more hedging needs in what turned into a self-reinforcing death spiral for a while for the higher rated tranches that went well beyond what anyone would consider reasonable fundamental prices. For example, for the current series (they had been updating with new series based on new loan pools every six months until subprime issuance stopped and new pools stopped being formed), which reflects loans made in the first part of 2007, the AAA rated index is trading barely above 50 cents on the dollar. That implies something on the order of 70% default rates on these loans and 50% recovery on the defaulted loans, and that's for credit enhanced AAA rated securities. One of my colleagues described that as implying a Baghdad like outcome for the U.S. housing market.

[Kraaze]

AS Phil said, links please. Day traders, historically, have pretty bad track records.

Oh I'd agree they would. I said sharp players, not average ones.