The big one is coming
Today the markets tanked again, losing 2.5% in the day session. The gains from the FED effect are gone. While I believe that the real effect of the FED facilities should start on March 27, meanwhile, I think we are in for the another drop. The FED have one more real bullet or 2 little pills and after that it is printing presses time.
The signs I am looking for before I call "fat lady singing" are a slow-down in the rate of hedgies going pop-pop, another bankruptcy like Bear (or a close-call), a dollar stabilization, the commodities burst, one more scary drop in the dow and a final, FED action.
Buckle your seat belt Dorothy, because Kansas is going bye bye. Welcome to the 21st century.
The signs I am looking for before I call "fat lady singing" are a slow-down in the rate of hedgies going pop-pop, another bankruptcy like Bear (or a close-call), a dollar stabilization, the commodities burst, one more scary drop in the dow and a final, FED action.
Buckle your seat belt Dorothy, because Kansas is going bye bye. Welcome to the 21st century.
Comments
Given your experience with the IT industry, how do you think this economic turmoil will affect the software industry? What happens to Oracles, IBMs, and RedHats of the world?
-Ray
Invest in cheap cuts of meat, people will stop buying filet mignons.
Marc,
Sit tight, monetary policy tends to have an real effect-lag of a few months to a Q. We can't gauge the effect immediately, as the market forecasting a Fed, tends to nullify the immediate effects of the cut. ie. Wall Street works on perception.
.. either way, its all a big sh*t sandwich, and we're all gonna have to take a bite. ;-)
Last time around it helped OSS. One of the first things that go in recessionary environments is CAPEX. Development of new things goes there. That being said OPEX doesn't move, what is in operations stays there and is part of the on-going cost of running their business as is. In other words, the big guys don't hurt on maintenance that much and the new guys can get some marketshare of the new projects.
I also think that the new facility thing kicking in on March 27 will have a continuously stabilizing effect. I discount the alarmist coverage that poopoo the fed interventions.
It'll be interesting to see what happens in the next couple weeks.
I heard a very interesting wall st rumor last week. J.P. Morgan was prepared to pay considerable more than $2 a share for Bear Stearns. It was the Treasury that insisted on that price. The logic being that if the FED was going to bail Bear out, they were going to ensure that all shareholder equity was destroyed in the process.
Also, a D&O insurance specialist told me that Bear does not have anywhere near enough D&O insurance to cover the suits that will be brought against them. ISS (Instutional Shareholder Services) is going to ensure that examples are made of Bear's board members and that they have to take large sums of money out of their own pockets. Happy Easter.
An interesting point. I believe Hank Paulson was running Goldman Sachs during the LTCM meltdown. Bear Stearns was one of the firms that was asked to help clean up the mess but they refused to participate. I've never met him, but Hank Paulson always struck me as the sort of person who has a long memory and offers sympathy with a whip (or a $2 per share price).
I have a hunch you're right, there will be some more big banks that will fall.
Andy
I didn't realize Paulson was with GS previously. Kinda makes sense. I had heard the story about Bear making enemies when they refused to chip in in the LTCM rescue but didn't realize the connection was really 1 degree of separation (Paulson).
The wipping out of equity is an interesting bit of information that i find shocking. I would have of course assumed it was JPMG that negociated it. If that is the case would another bidder take the cake or will the FED intervene (how?).
It is sad that a bunch of people are going to go through personal hell but I can see how regulation is going to come back with a stick. It is true that the gains some people made there were 'undeserved" but they are going to pay for everyone else that is running away with the bonuses from past years as the system wobbles.
The wipping out of equity is an interesting bit of information that i find shocking. I would have of course assumed it was JPMG that negociated it. If that is the case would another bidder take the cake or will the FED intervene (how?).
This same rumour made it to FT commentary as well this weekend -- it does put a bit different spin on things. JPMorgan is no longer the master bottom fisher but it would be actually the fed giving a lesson on moral hazard.
The numbers FT gives is for the chairman and ex-ceo going from 500m net worth down to 12m. The unpleasant part is that, according to FT, Bear had a compensation structure where bonuses were paid at least in part as equity that vested over some time -- in order to reduce stupid risk taking. JPMorgan is dealing with a large number of unhappy Bear executives right now.
Fed would intervene with alternative bid by pulling the 30bn funding they agreed to put in to boost Bear's balance sheet with the JPMorgan deal.
Commodities drop: check
And the two are somewhat linked so it doesn't really count as 2 separate predictions and then again, maybe it is just volatility...
On has to wonder if we aren't seeing a shift from management bearing the responsibility for corporate actions to the board bearing responsibility?
I am more convinced today than I was last week that more banks will go down. The next 18 months are going to be rough and very interesting, says the guy with a small software/consulting company that focuses on risk monitoring.
pretty cool about your software company. I haven't blogged about the Greenspan call for reform of risk models... what was your take on that? Full of it as most of the blogosphere called?