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Whose's calling the kettle black - banks or hedge funds?

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February 16, 2008 – Comments (5)

I have a number of reasons for not being in the market:

  • Hedge funds
  • Bank's insolvency
  • Brokerage insurance
  • Excessive debt
  • Derivatives
  • leverage

I'd have to say fear of hedge funds unwinding, bank insolvency and safety of unvested funds are key reasons I moved my money away from brokers and into a couple different banks.  I consider them all a problem and that all give justifiable reason to be concern.

Well, two major players in my fears appear to be distrustful of each other.

That's just a hoot... 

5 Comments – Post Your Own

#1) On February 16, 2008 at 1:22 AM, HistoricalPEGuy (64.52) wrote:

I would add:

* Out of Control Government Spending

Stimulus Package - It worked after Sept 11 for the simple reason that people locked themselves inside their house watching CNN 24-7.  $300 got them out and spending.  

What's it going to do this time?  Provide a small boost to the retail sector?  Please.  $160 billion down the tubes.

Truth or Dare

HPEGuy: "hey dwot, Truth or Dare"

dwot: "Dare"

HPEGuy: "Next blog, write something about how good will come out of this mess"

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#2) On February 16, 2008 at 4:36 AM, DemonDoug (73.55) wrote:

dwot, are you 100% no equities at all?  I've kept about I think around 15% of my taxable accounts in stocks, partly for diversification and partly as a hedge against dollar collapse.  I keep waiting for gold to correct though.

dwot, don't listen to historical pe guy.  You keep doing whatever you feel is right. :)

Incidentally, I completely agree.  I think that most people just don't quite get how bad it really could be.  My feeling is that if the Fed hadn't intervened and if it wasn't propping up the financials, we'd be down about 40% from the october highs, and maybe even more, with a "black swan" day or even week.  We would have already had a panic sell-off.  I think the Fed's interventions so far have actually been the right move, at least as of late, because no one has panicked - yet.

I feel as though a 1987 type event can't happen because of the trade restrictions, but I would not be surprised if we get a 20% drop in a 5 day trading period at some point.  What do you think, pretty good chance of a black swan event?

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#3) On February 16, 2008 at 9:08 AM, CycleFreak7 (< 20) wrote:

At this point, I believe the greed running rampant in the market combined with corruption and outright fraud are good enough reasons to pull money out of equities.

Hedge Funds are a nightmare for smaller investors. I've been a spectator and have watched what has happened to many different companies as they reported earnings over the past month.

The pattern is clear:

(1) Company is going to report stronger than expected earnings

Heavy selling (more likely, shorting) during the 5 or 6 trading days before earnings reports.  This causes signicant enough percentage drops that anyone with trailing stops on the stock are hit and triggers more market-sell orders which accelerates the downtrend.

Magically, this trend will reverse as the corrupt funds (who know exactly what is coming on earnings day) begin covering the short positions and then buying up the stock at fire-sale prices.

Earnings are released and the stock spikes. At this point, the corrupt funds have made giant piles of cash on the way down and on the way up.  All in the span of a 10 trading days (or less).

(2) A company is going to miss or merely meet expectations and/or potentially guide lower for the year.

The stock will have a general, slower uptrend leading to earnings. All the while, the funds have been accumulating short positions because they know what's coming.

Earnings are released and the stock drops like a rock. Now the short positions are slowly covered and profit is reaped again.

Anyone who does NOT believe that insider information is shared to outsiders is fooling themselves. Everyone has their price and when milions (or billions) are at stake, that price is easily met.

The almighty dollar leads to corruption and unethical / illegal behavior. These funds have more capital to throw around than the market cap of most companies. If they wanted to throw their full financial force at a particular company, there's no doubt in my mind that they could drive the stock in one direction or another.

Personally, I think the markets would be far better off and much more stable if the practice of shorting stocks was abolished.

If many hedge funds fail this year, I will be singing a happy song of joy and relish in their collapse.  Just desserts for the rampant greed and corruption that has consumed the financial markets in this country.

 

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#4) On February 16, 2008 at 9:46 AM, dwot (47.53) wrote:

HistoricalPEGuy, I've been at the paying end of these f--k-ups before, so the way I look at it, been there, done that, and I don't want to repeat.  The markets are the kind of mess that can burn you bad and the good that comes out for individuals is you protect your capital and wait for it to settle, and understand what is happening.  I could be wrong, but I think that how ever this thing plays out, I have positioned myself to be a lesser loser and possibly a winner.

Doug, I am just 2% in equities and I guess my hubby is about 4%, so pretty much out.  I am so toasted if there is a dollar collapse.

I think people are relying on past experiences in thinking the Fed intervention is going to help and they just don't appreciate the devil that is low interest rates.  Now we'd got the whole freaking world up to their eye-balls in low interest rate debt and has been leveraged.  The municipal bond auction freeze is a prime example.

I don't know how the events play out, but a 20% drop in 5 days would not surprise me...  In today's dollars I think the Dow is still over priced in the range of double. 

I think margins are going to be enormously squeezed as debt gets repriced to include risk.  When I was a young adult you'd always get an extra 2-3 percent for locking into a 5 year term deposit over a 1 year term deposit and that spread just seemed to disappear, and also, I'd just look at the rates and think there was no way I'd want to lock in for that.

I think the market is headed lower, considerably lower, but whether it is a couple years of slow pain or goes quickly remains to be seen. 

I am still thinking we see deflation, where inflation is defined as an increase in money supply either due to printing or credit.  We will see deflation because of credit contraction.  The price increases we are seeing are not due to increasing money supply anymore, but due to the existing money supply still working its way through the economy.  At least that's my belief. 

And when the increase of money supply is leveraged about 30 to 1 because of credit, well, they double up the amount of printed money, you still have a leverage of 15 to 1 which is still higher than historical, financially stable norms.  Who knows, maybe they do double the printed money supply.  I think they definitely print some, but overall the money supply contracts due to reduced banking leverage of money supply.  So, asset prices decline, at the same time the existing money supply continues to work its way through the economy.

I think there is definitely a time lag between an event and how long it takes to work through the economy. 

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#5) On February 16, 2008 at 10:01 AM, dwot (47.53) wrote:

"At this point, I believe the greed running rampant in the market combined with corruption and outright fraud are good enough reasons to pull money out of equities."

I couldn't agree more.  I've been going on and on about debt repricing and commodity price inputs going up and completely squeezing margins, but then there is the executives that have been running companies to the ground with the borrowing and buyout plans that give the appearance of "gee, what a great investment because my paper wealth is up x dollars" and the executives are cashing out their stock options at an unprecedented rate.   Look at google for example, the stock based compensation works out to about $200k per employee.  I found crunching the numbers on where the money was actually going for google quite shocking and investors really aren't pricing this kind of thing into their investments.

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