Friday, September 26, 2008

a few thoughts

Well instead of looking into a specific company I think, atleast for me, its more productive to look at the economy and the financial state right now.   My next post can be more tied to an investment idea...

It goes without saying that the financial system is in turmoil, needs help, and desperately needs some type of rescue/bailout/or whatever you want to call it from the governement and they need it soon.  On this front, it really angers me that something hasn't gotten done yet.  It seems to me that Congress is postering in an election season and trying to do whats "best" for their constituents.  Having said this maybe its not their fault and they are in fact listening to their voter base and its the general public that is the problem.  They just dont understand the plan for one, the way we got to this point second, and how it will affect them if some sort of plan doesnt get passed.   The general American public hears the figure 700 billion and think that they are going to have to pay ALL of that and dont realize that this could be a "good" investment for them.  Even if it turns out to cost the Amerian taxpayer a certain amount of money(which that certainly isnt clear) isnt that better than if the country slips into a deep recession or even a depression if nothing gets passed?   Lost jobs, depressed prices in the stock market leading to loss of retirement savings, etc....I thought Bush laid this out pretty well and in plain language in his address the other night.  Is the American public just not smart enough or maybe not perceptive enough to see this, or am I just wrong?

Another thing that has been bothering me lately is that everyone is putting this crisis squarely on Wall Street.  While they deserve much of the blame doesnt the individual homebuyer have something to do with this as well?  I know that banks in some cases probably targeted uninformed potential homebuyers into some crazy loan structures but the buyer ultimately signed the papers and committed to paying a mortgage.  There has to be some blame placed on "Main Street" as CNBC so lovingly likes to call them.

Ok so all of that is repetitive, just trying to get some ideas on paper...

A few questions for us to ponder?  Is JP Morgan taking over the US?  They are getting some incredible deals out of this crisis as far as I can tell.  Am I missing something but are they getting WAMU's deposits and assets for 1.9 billion (going to the FDIC)?  Also do you think there is going to be an exhange created for the CDS market?  It seems that the lack of disclosure certianly hurt and led us partly to where we are now(as you know probably better than I).   And I know you are disappointed about RIMM and not hanging on to your short position, but is it time to buy a name like this(for a longer time horizon of course)?  Maybe i'll do some research on this as my next investment idea...ok thats it for me now.  Let me know if I'm off base with anything here.



kate said...

I was actually suprised that Bush gave a pretty clear explanation of the crisis in his speech as well. Whoever his speech writer was actually did a good job I thought. However, I am not sure how many people were actually listening (given the source!) Also, it is kind of confusing how everything is so intertwined...cause and effect, etc.

I have to say I was ready to blame this crisis mainly on wall street but i am starting to understand more that many banks were allowing people on "main street" to get loans they should have never qualified for...I am all for equal opportunity to be a homeowner but you do have to set some fairly stringent standards. This is the biggest investment that many people ever make. If their credit is low and they have no savings, they really have no business buying a home.

So basically...this is how i understand the root of the problem. Banks allowed many new homeowners to get mortgages (with little to no money down?) and these homeowners often had bad credit, etc. Many of these new homeowners were also middle class people who thought they could make a quick buck by buying a house and then selling it for a much higher price. During this time, builders were also building too many houses. I also assume this drove the value of the houses down in combination with all of the homeowners starting to default on their loans.

At the same time, investment firms were bundling all of these mortgages together and selling them to investors as mortgage backed securities. During this time there was little regulation and no transparency, so a lot of investors didn't really know what they were buying.

What role did credit default swaps play in the Wall Street meltdown? It is my understanding that companies sold these to investors as "insurance" on their investments. However, this "insurance" was named something else in order to get around regulatory requirements. Then, when investments started to sour with the housing market tanking, then companies like Bear Sterns, Lehman Brothers, etc. didn't actually have the money to pay all of their investors and started to go under... causing a chain reaction...Freddie Mac...Fannie Mae...etc.

And this ultimately caused the credit crisis we are in now.

So now that the bailout is passed, why does the DOW keep going down and investors are frantically trying to sell? Are investors afraid of something worse (i.e. recession) and trying cut their losses? How long will it take the government to pump all of the bailout money into the markets and start to stabilize these companies and banks? Also, where are we getting all of this money for the bailout? I assume foreign investors who we already owe a ton of money China, other countries in Asia. Also, does the bailout plan include clauses to basically pay taxpayers back once they recoup the money? Will they recoup the money eventually? I have another question as it really true that we had a huge budget surplus when Clinton left office?

Also, it sounds like their were a lot of clear signs that this predicament was going to happen? Did the government purposely turn a blind eye?

So that is my amateur understanding of the current crisis. However, I don't think many people are spending the time to actually think about all of the aspects that were involved in the current crisis. Just some thoughts on the subject. Enjoyed the two articles. Will check in again soon. Also, I was thinking once you get this would be nice to divide your blog into sections for the amateur investor and the more discerning investor. I know I could definitely use some practical advice on investing :)

Mike said...

I actually think you have a much better idea of the "credit crisis" then the average citizen. To answer a few of your questions from my "slightly better than amateur" view is that the Dow is selling off because there is a "crisis of confidence" in the markets. No one trusts anyone else and so therefore doesn't want to do business, loan any money, etc to anyone else. They just don't know enough about everyone else and therefore don't want to deal with anyone. I heard a pretty good analogy the other day that went like this. You are in a room with 100 other people and I tell you that two people have an incurable disease and if you touch them you will get it too. Are you going to touch anyone in the room? Of course your aren't unless you know exactly who they are. This is kind of whats going on in the markets. Banks don't know who has the "disease" and are unwillingly to touch them. Thus if no one wants to loan anyone else money, business doesn't get done, small businesses go out of business, job losses ensue, the country goes into get the idea. Apple won't sell as many Ipods, google won't sell as many adds, etc. And thus stocks go down.

You make a good point about how long will it take to get the Bailout money in the system. No one really knows this. And so this, along with the fact that many know this isn't a complete cure all and that the credit markets are still frozen is adding even more downward pressure on the equity markets.

Having said all of this, I think the market does have some very oversold securities and good opportunities that if you have a long enough time horizon will be bargain buys. What those are I am not exactly sure of and plan on doing some research on. I do know this, however, if you were to by the S&P ETF (exchange traded fund) right now and hold it for 5 years I can't imagine that you would regret this move. I'm not saying it wouldn't go down another 10 even 20 percent but in the long run it certainly wouldn't be a bad move to get in now...

kate said...

That is a good analogy. The social psychology behind the current financial climate and decision-making is pretty facinating in a way... Essentially what you descibe is hysteria in the current markets.

One other thing I was thinking is who qualifies for the bailout money? Do you basically have to be a big company like AIG with market movements that impact the global markets?