Remember last week, when it seemed like the financial world was facing enormous hurdles and markets were plunging worldwide? I was talking people off the ledge, attempting to calm frayed nerves and reminding folks that volatility breeds opportunity. What a difference a week makes. Yesterday, as I was leaving the office, an employee from a neighboring company said, “I guess everything’s better in the market now, huh?”
The swing between last Tuesday (January 22), when the Federal Reserve announced the massive 75 basis point (3/4 of a percentage point) cut and yesterday’s close can not be measured just in points gained in the Dow Jones Industrial Average, but in the roller coaster of emotions that ran through Wall St and Main St alike. People went from feeling terrible about the economy and the markets to considering that maybe the worst is over and January was just a bad dream. Maybe it is all over and we are about to start another bull run, or maybe the next shoe of the subprime crisis is about to drop, but either way, I can’t help but think about what my dad used to say: “it’s never as good or as bad as you think.”
That saying is a useful way to keep in check in almost any financial situation. For example, it probably would have been wise for the would-be Florida condo flipper in 2006 to remember that the massive gains in housing could not possibly continue forever. Similarly, last week when it felt like every stock was tanking, it would have been helpful to consider that the entire US economy was not falling apart—if fact, there are many industries that are doing quite well.
One of the biggest problems that investors have to guard against is that when people feel better, they tend to take more risk and as a result, often unwittingly buy at the worst possible time. As James Grant described it in the New York Times (Jan 27, 2008), “Profit-seeking people will take more financial risk when they believe the coast is clear. By taking bigger chances, however, they unwittingly make the world unsafe all over again.” Conversely, when people are nervous, they are unable to take the risk that maybe they should take, that is, buying low.
By reminding yourself that most of the time, things really are not as bad or as good as you think, you may be able to navigate markets (and the news cycle) with a bit more sanity and hopefully allow yourself to save or make more money. At the very least, you’ll probably sleep better.
Friday, February 1, 2008
Thursday, January 31, 2008
Sell the Fact
The old Wall Street chestnut, “Buy the rumor, sell the fact”, came to fruition yesterday. Just ten days ago, it looked like US equity markets were about to take a major drubbing, but then a rumor circulated that perhaps the Fed might step up its interest rate cut campaign. Indeed, the Fed cut interest rates by ¾% last week and then, for the second time in nine days, the central bankers dropped short-term lending rates to 3% and left the door open to more cuts in the future-- the accompanying statement noted “downside risks to growth remain” and the Fed would “act in a timely manner as needed to address those risks.”
You might have expected that such an aggressive monetary easing campaign in a short time would propel markets higher, but after attempting a post-Fed rally, investors sold off stocks by the end of the day yesterday. What’s going on -- isn’t a rate cut a good thing for stocks? The answer is, yes, it should be, but investors are still fighting off an almost endless barrage of bad news. In addition to the 2008 fears of recession and subprime spillover, the financial sector suffered a downgrade of the large bond insurer Financial Guaranty Insurance after the Fed announcement. The news led many to surmise that additional downgrades could force some institutions to sell securities that were previously AAA-rated, adding to the downside pressure.
The prospect of forced selling of an already-beleaguered asset class was enough to take the wind out of the Fed news and sober up the folks who had drifted towards the punch bowl of liquidity that had been rolled out by Bernanke and friends. The asset addicts were lured by the Fed’s market-motivated actions and comments: “Today's policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity”. It’s almost as if they were saying, “come on in---the punch bowl has just been refilled and we know if you keep drinking it, everything will get much better!”
Before you drink from the Fed’s punch bowl and find yourself in a giddy state, remember that we are still in the midst of determining the damage --- of tallying losses at the nation’s banks, surveying the continued deterioration in the housing market and understanding the risks that lie ahead. I think that what will keep the market mired in the mud for a bit longer is the continued concern over the effects of the credit crisis and how it has infected other parts of the economy.
The good news is that the combination of an aggressive Fed and new fiscal stimulus should promote a healthy economy, eventually. Before you rush in, be forewarned that getting there could continue to be a messy process. Even the Fed acknowledged that “financial markets remain under considerable stress, and credit has tightened further for some businesses and households.” Now that’s a fact you don’t have to sell.
You might have expected that such an aggressive monetary easing campaign in a short time would propel markets higher, but after attempting a post-Fed rally, investors sold off stocks by the end of the day yesterday. What’s going on -- isn’t a rate cut a good thing for stocks? The answer is, yes, it should be, but investors are still fighting off an almost endless barrage of bad news. In addition to the 2008 fears of recession and subprime spillover, the financial sector suffered a downgrade of the large bond insurer Financial Guaranty Insurance after the Fed announcement. The news led many to surmise that additional downgrades could force some institutions to sell securities that were previously AAA-rated, adding to the downside pressure.
The prospect of forced selling of an already-beleaguered asset class was enough to take the wind out of the Fed news and sober up the folks who had drifted towards the punch bowl of liquidity that had been rolled out by Bernanke and friends. The asset addicts were lured by the Fed’s market-motivated actions and comments: “Today's policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity”. It’s almost as if they were saying, “come on in---the punch bowl has just been refilled and we know if you keep drinking it, everything will get much better!”
Before you drink from the Fed’s punch bowl and find yourself in a giddy state, remember that we are still in the midst of determining the damage --- of tallying losses at the nation’s banks, surveying the continued deterioration in the housing market and understanding the risks that lie ahead. I think that what will keep the market mired in the mud for a bit longer is the continued concern over the effects of the credit crisis and how it has infected other parts of the economy.
The good news is that the combination of an aggressive Fed and new fiscal stimulus should promote a healthy economy, eventually. Before you rush in, be forewarned that getting there could continue to be a messy process. Even the Fed acknowledged that “financial markets remain under considerable stress, and credit has tightened further for some businesses and households.” Now that’s a fact you don’t have to sell.
Wednesday, January 30, 2008
State of the Union vs. FOMC
Because the writer strike is still going on, the discussion around the water cooler this week may turn to a critical analysis of the State of the Union address vs. the Federal Reserve announcement on interest rates and the accompanying statement. My guess is that the Fed will win hands-down.
President Bush walked into the chamber (a colleague of mine cries when he sees this pomp and circumstance) knowing that his final address to the nation would be a tough one. He faces rock-bottom approval numbers with 11 months to go in a lame duck presidency. The pre-game buzz was that the President would emphasize the weakening economy, especially now that it has become top on the list of voters’ concerns. Instead, he chose to concentrate on the defining issue of his presidency: the war in Iraq. Score one for consistency, but I’m guessing that people wanted to hear something more creative than what boiled down to “let’s make all of the tax cuts permanent.”
The current economic malaise is better material for Ben S. Bernanke (BB), Chairman of the Federal Reserve. We will hear whether the Fed will follow last week’s surprise three-quarter of a percent rate cut with another ¼ or even ½ when the central bankers finish their meeting this afternoon. Investors are watching every move that the Fed makes and of course, we are all judging every micro-step along the way. My two cents is that the Fed is getting to the right place on rates, but for the wrong reasons.
It now appears that only when the Fed got spooked by falling markets, did the bankers determine that they were behind the curve on tightening amid a weakening economy. Unfortunately, that is exactly what Bernanke was trying to avoid when he held firm on rates for so long in the face of deteriorating financial conditions. You could almost hear him saying to himself, “I am not going to be a patsy—they think they know what I’m going to do, but I don’t have to ratify expectations to appease them…I am my own man, darn it!”
I am not quibbling—I am just happy that we are getting there, but with the last move, BB may have sealed his fate as “Greenspan II”---a central banker who is more content to allow inflation to bubble up than to be seen as an anti-growth, inflation hawk. While that may be BB’s true disposition, I can’t figure out how there will be rampant inflation at the same time that two compelling, deflationary forces are at work: a deep housing recession and a credit crisis. Both of these factors should eventually help contain inflation, despite what the gold bugs say.
If BB gets us through this period with limited damage, he will still face scrutiny and opposition. There will be those who note that by not allowing a more pronounced clearing out of excess, BB has sewn the seeds of the next bubble. Considering that the US economy has now lived through two bubbles in eight short years, does this mean that the next one will have even more dramatic results? Time will tell…
President Bush walked into the chamber (a colleague of mine cries when he sees this pomp and circumstance) knowing that his final address to the nation would be a tough one. He faces rock-bottom approval numbers with 11 months to go in a lame duck presidency. The pre-game buzz was that the President would emphasize the weakening economy, especially now that it has become top on the list of voters’ concerns. Instead, he chose to concentrate on the defining issue of his presidency: the war in Iraq. Score one for consistency, but I’m guessing that people wanted to hear something more creative than what boiled down to “let’s make all of the tax cuts permanent.”
The current economic malaise is better material for Ben S. Bernanke (BB), Chairman of the Federal Reserve. We will hear whether the Fed will follow last week’s surprise three-quarter of a percent rate cut with another ¼ or even ½ when the central bankers finish their meeting this afternoon. Investors are watching every move that the Fed makes and of course, we are all judging every micro-step along the way. My two cents is that the Fed is getting to the right place on rates, but for the wrong reasons.
It now appears that only when the Fed got spooked by falling markets, did the bankers determine that they were behind the curve on tightening amid a weakening economy. Unfortunately, that is exactly what Bernanke was trying to avoid when he held firm on rates for so long in the face of deteriorating financial conditions. You could almost hear him saying to himself, “I am not going to be a patsy—they think they know what I’m going to do, but I don’t have to ratify expectations to appease them…I am my own man, darn it!”
I am not quibbling—I am just happy that we are getting there, but with the last move, BB may have sealed his fate as “Greenspan II”---a central banker who is more content to allow inflation to bubble up than to be seen as an anti-growth, inflation hawk. While that may be BB’s true disposition, I can’t figure out how there will be rampant inflation at the same time that two compelling, deflationary forces are at work: a deep housing recession and a credit crisis. Both of these factors should eventually help contain inflation, despite what the gold bugs say.
If BB gets us through this period with limited damage, he will still face scrutiny and opposition. There will be those who note that by not allowing a more pronounced clearing out of excess, BB has sewn the seeds of the next bubble. Considering that the US economy has now lived through two bubbles in eight short years, does this mean that the next one will have even more dramatic results? Time will tell…
Tuesday, January 29, 2008
Bubble-Logic
I watched Sixty Minutes two nights ago and found myself yelling at the TV. The story was about subprime, the housing crisis and the real people who have been caught in the mess. While I am pleased that CBS decided to cover the story—even if it is about six months late, it left me angry.
Here’s how it started: a big graphic, blazing a headline, “House Of Cards: The Mortgage Mess,” followed by a voice over that stated “It sounds complicated, but it's really fairly simple. Banks lent hundreds of billions of dollars to homebuyers who can't pay them back. Wall Street took the risky debt, dressed it up as fancy securities, and sold it around the world as safe investments. It sounds like a shell game or Ponzi scheme; in some ways, it was a house of cards rife with corruption, greed, and negligence.”
Like another bubble before it, the housing boom and bust has created a mythology around facts that just don’t add up. It is true that banks extended loans to some people who did not understand what they were doing and who ultimately could not pay back the money when their rates jumped. It is also true that banks made loans to plenty of people who knew exactly what they were doing.
To put this in terms of the tech stock bubble: in the former case, maybe Mrs. Jones did not fully understand the risk she was taking when she bought a load of tech stocks in the nineties (although I am skeptical that people really did not know what they were doing) and therefore was plenty upset when everything collapsed. In the latter case, your cousin knew exactly the risk he was assuming when he started buying IPOs during the same period, but he was still bitter when the losses came and even said that the broker should not have sold him the risky stuff, even though he had requested to make the transaction.
It’s the second group that is making me crazy right now. These people are very upset that the bet they made has turned sour and expect that the rest of us good guys feel bad for them and make it better. I nearly lost it when one of the people highlighted in the story wondered why she should make her increased mortgage payment, to which the interviewer noted, because “That's what you agreed to do when you bought the house.” She then had the nerve to say, “Fine. If the value is going up. But we're not going anywhere. The price or the value is going down.” In other words, why should she make good on a promise when her bet went against her? This is what I call “Bubble Logic,” which only sounds rational to the person whose gotten socked when the bubble bursts.
I am not saying that there was not greed all around in this mess. Both lenders and borrowers got caught up in a euphoric market and poor decisions were made. We can look back on every bubble and see where the good idea was, but ultimately, the excesses sow the seeds for the future demise. In fact, it is only when times are really good that people take more risk—they feel inoculated against lost and are unable to see the downside. “How can I lose in real estate?” many asked…well, now they are seeing for themselves exactly how they can lose: yesterday it was announced that new-home sales tumbled 4.7% from the previous month to the lowest mark in 12 years during December. The median price of a new home fell 10% from a year earlier to $219,200. For all of 2007, sales of new homes dropped by 26.4%.
Here’s how it started: a big graphic, blazing a headline, “House Of Cards: The Mortgage Mess,” followed by a voice over that stated “It sounds complicated, but it's really fairly simple. Banks lent hundreds of billions of dollars to homebuyers who can't pay them back. Wall Street took the risky debt, dressed it up as fancy securities, and sold it around the world as safe investments. It sounds like a shell game or Ponzi scheme; in some ways, it was a house of cards rife with corruption, greed, and negligence.”
Like another bubble before it, the housing boom and bust has created a mythology around facts that just don’t add up. It is true that banks extended loans to some people who did not understand what they were doing and who ultimately could not pay back the money when their rates jumped. It is also true that banks made loans to plenty of people who knew exactly what they were doing.
To put this in terms of the tech stock bubble: in the former case, maybe Mrs. Jones did not fully understand the risk she was taking when she bought a load of tech stocks in the nineties (although I am skeptical that people really did not know what they were doing) and therefore was plenty upset when everything collapsed. In the latter case, your cousin knew exactly the risk he was assuming when he started buying IPOs during the same period, but he was still bitter when the losses came and even said that the broker should not have sold him the risky stuff, even though he had requested to make the transaction.
It’s the second group that is making me crazy right now. These people are very upset that the bet they made has turned sour and expect that the rest of us good guys feel bad for them and make it better. I nearly lost it when one of the people highlighted in the story wondered why she should make her increased mortgage payment, to which the interviewer noted, because “That's what you agreed to do when you bought the house.” She then had the nerve to say, “Fine. If the value is going up. But we're not going anywhere. The price or the value is going down.” In other words, why should she make good on a promise when her bet went against her? This is what I call “Bubble Logic,” which only sounds rational to the person whose gotten socked when the bubble bursts.
I am not saying that there was not greed all around in this mess. Both lenders and borrowers got caught up in a euphoric market and poor decisions were made. We can look back on every bubble and see where the good idea was, but ultimately, the excesses sow the seeds for the future demise. In fact, it is only when times are really good that people take more risk—they feel inoculated against lost and are unable to see the downside. “How can I lose in real estate?” many asked…well, now they are seeing for themselves exactly how they can lose: yesterday it was announced that new-home sales tumbled 4.7% from the previous month to the lowest mark in 12 years during December. The median price of a new home fell 10% from a year earlier to $219,200. For all of 2007, sales of new homes dropped by 26.4%.
Monday, January 28, 2008
Stim-U-Later
My time on Fox was brutal last week. Not when we were discussing the gyrating markets—that was fine, but when the talk turned to the stimulus package---look out! Everyone was out for blood, denouncing the plan as unfair (“how can it be a rebate when some of the recipients didn’t pay taxes?”) and encouraging bad behavior (“these people (the recipients) will just spend the money---compounding their problems!”) Woe was the lone voice who did not want to sink to the level of a politician, but that’s where I was.
On Wednesday, a guest of “Your World with Neil Cavuto” nearly took my head, because I couldn’t see his point about fairness. Here is my take on the issue: the term “tax rebate” is a misnomer; it should be called what it is: an Uncle Sam gift card. I noted that even I, a middle-of-the-road, left leaning gal, could see that it is not a "rebate" when someone has not paid in. That being said, this is a STIMULUS plan, which is putting the US economy ahead of any one group. The goal is to inject some life into the system, which whether it works or not, at least does provide a psychological boost to many.
On “Cavuto on Business”, the talk turned to money and politics again. The question was: Do National Front-Runners (Clinton & McCain) Have Wall Street Running Scared? The introduction to the story queried: Should investors be worried since neither would be a tax-cutting, pro-free-market president? Is Wall Street worried no candidate would be a true tax-cutting, pro-free-market president? Could this be contributing to the stock market's uncertainty and selloff?
My take on this one is that Wall Street is more worried about events unfolding right now (depth of a potential US recession/credit crisis spreading) than focusing on these candidates, whose status as frontrunner could change in a matter of moments; therefore, NO, I do not think it has anything to do with the sell-off of the past month. Are you going to dump your stocks based on who you think might get into office and what he or she could do? I have said over and over that a President’s impact on the economy is far smaller than the Chairman of the Federal Reserve.
I must confess that I received a bunch of nasty e-mails after my appearances from people who really hate anyone who does not see the joy in political jousting and certainly believe that “left” is a four-lettered word. One person asked, “If you repeat "William Jefferson Clinton" in your mind, does the Looney Tunes theme song also bounce around in your head?” The answer that I did not write—do these people expect me to hit reply when they send such rude messages?—is the following: all I hear when I repeat that name is an eight-year economic expansion and a rising stock market.
On Wednesday, a guest of “Your World with Neil Cavuto” nearly took my head, because I couldn’t see his point about fairness. Here is my take on the issue: the term “tax rebate” is a misnomer; it should be called what it is: an Uncle Sam gift card. I noted that even I, a middle-of-the-road, left leaning gal, could see that it is not a "rebate" when someone has not paid in. That being said, this is a STIMULUS plan, which is putting the US economy ahead of any one group. The goal is to inject some life into the system, which whether it works or not, at least does provide a psychological boost to many.
On “Cavuto on Business”, the talk turned to money and politics again. The question was: Do National Front-Runners (Clinton & McCain) Have Wall Street Running Scared? The introduction to the story queried: Should investors be worried since neither would be a tax-cutting, pro-free-market president? Is Wall Street worried no candidate would be a true tax-cutting, pro-free-market president? Could this be contributing to the stock market's uncertainty and selloff?
My take on this one is that Wall Street is more worried about events unfolding right now (depth of a potential US recession/credit crisis spreading) than focusing on these candidates, whose status as frontrunner could change in a matter of moments; therefore, NO, I do not think it has anything to do with the sell-off of the past month. Are you going to dump your stocks based on who you think might get into office and what he or she could do? I have said over and over that a President’s impact on the economy is far smaller than the Chairman of the Federal Reserve.
I must confess that I received a bunch of nasty e-mails after my appearances from people who really hate anyone who does not see the joy in political jousting and certainly believe that “left” is a four-lettered word. One person asked, “If you repeat "William Jefferson Clinton" in your mind, does the Looney Tunes theme song also bounce around in your head?” The answer that I did not write—do these people expect me to hit reply when they send such rude messages?—is the following: all I hear when I repeat that name is an eight-year economic expansion and a rising stock market.
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