This simple table shows how we have done Year-to-Date (past 8 months):
Here are the same countries returns, Quarter-to-Date (beginning June 30th close)
If the most bullish thing markets can do is go up, than what might these returns imply . . . ?
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See also:
Asian, European stocks plunge
MARI YAMAGUCHI
Associated Press, August 16, 2007
http://tinyurl.com/2no9za
What would Warren Buffett say?
Off topic, as usual, but it’s time to revisit the Berkshire Hathaway 2002 letter to shareholders and do a search on the word “derivatives”:
Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.
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Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others. On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems.
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When Charlie and I finish reading the long footnotes detailing the derivatives activities of major banks, the only thing we understand is that we don’t understand how much risk the institution is running.
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The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerous they are has already permeated the electricity and gas businesses, in which the eruption of major troubles caused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives business continues to expand unchecked. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts.
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In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
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In extreme cases, mark-to-model degenerates into what I would call mark-to-myth.
Warren E. Buffett
February 21, 2003
Chairman of the Board
I took a look at the Berkshire Hathaway 2002 that Michael M references above and found this additional gem (amazingly prescient!):
Another problem about derivatives is that they can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a company suffering a credit downgrade immediately supply collateral to counterparties. Imagine, then, that a company is downgraded because of general adversity and that its derivatives instantly kick in with their requirement, imposing an unexpected and enormous demand for cash collateral on the company. The need to meet this demand can then throw the company into a liquidity crisis that may, in some cases, trigger still more downgrades. It all becomes a spiral that can lead to a corporate meltdown.
not to nitpick, but remember this table doesn’t include dividends—
the S&P is actually up on that basis–at least until 9:31 today anyway!
JW
Derivatives per se clearly have a utility. More than seeing Derivatives as WMDs, I think the problem is much simpler in terms of how Risk is being priced and how its purchase is being funded. It is this area that has gone wrong.
In the end, as we all come to realize sooner or later, pricing, capital structure: they all matter, whether it is a soap that is being bought or a complex CDO on a sub prime underlying. Rest assured, all this would soon be forgotten, again.
As of Aug. 14, 2007
National Debt $8,974,089,870,614.38
New all-time high
We are in technical default, yet nobody is talking about this. What happened to Oct. 2007 Mr. Treasury Sec.?
PJ wrote: “Derivatives per se clearly have a utility. More than seeing Derivatives as WMDs, I think the problem is much simpler in terms of how Risk is being priced and how its purchase is being funded. It is this area that has gone wrong.”
Expanding on this concept, the problem seems to be that it is impossible for the markets to price risk if the factors are unknown. The derivatives market is uniquely opaque, mostly OTC. No one knows who holds risk, how much, or what other entities could be impacted.
How does one price the unknown? It is much like trying to guess what’s behind door #3.
The shills on CNBC are screaming for a .25% rate cut. LOL! It’s OK for the little guy to get hammered, but God forbid the Hamptons Crowd having to take some major losses. To the shills, please kiss my lilly white ass.
One shill went so far as to mention Cramer’s rant. The damn fool doesn’t even know that Cramer has become a laughing STOCK with his rant. Oh also it would help out consumers with credit card debt. Is the jackass kidding?
Poole and Paulson just yesterday made clear there will be no bailout. Go fix your wrong way bets, and deal with your losses just like all the other grown ups. Frigging morons.
What he said…….LOL
BTW you can officially cancel Xmas from the retailers perspective……
Someone working EXTREMELY hard pushing up GS stock this morning….
Ciao
MS
$17 Billion added, and the financials are suddenly up. Where oh where did that $17 Billion go? Let me see…
SPECTRE: agree, $17 B in but $11B just went down the rat-hole of Countrywide when they seized their CP back-up lines from the money-center banks. i would think we’re closer to the beginning of the liquidation given the Yen trade today.
I’m here to tell ya that there will be more infusions coming. Maybe another $17 Billion gets us green for a New York Minute?
The sad part is that this is exactly what the market should be doing for all the malinvestments that were made. To think that we can no longer have major moves down, which is a function of the market, is pathetic.
Two more items on the shills of CNBC. They are all fully invested and they see this as the bottom if the FED cuts rates. Am I supposed to trust these people with my money? I don’t thinks so. Maybe Goldilocks and Kudlow can throw some cash into the account since we are at a bottom.
you saw Cashin just now, the old grey-beard says Goldilocks has been running wild w Lindsay and Britney. gawd that’s a good one.
To make this perfectly clear, we have this little beauty. The markets being flat for the year or slightly negative isn’t a calamity. When the little guy had his head handed to him in 2000 that was a calamity. $5 TRILLION DOLLARS were vaporized.
Poole Says Only `Calamity’ Would Justify Rate Cut Now (Update2)
By Anthony Massucci and Kathleen Hays
William Poole, president, Federal Reserve Bank of St. Louis Aug. 16 (Bloomberg) — William Poole, president of the St. Louis Federal Reserve Bank, said the subprime mortgage rout doesn’t threaten U.S. economic growth, and only a “calamity” would justify an interest-rate cut now.
Poole, who confers regularly with regional business contacts and votes on rates at the Fed this year, said in an interview yesterday that “no one has called up and said the sky is falling.” The best course is for officials to assess economic figures, including the August jobs report, when they next convene on Sept. 18, he added.
The comments suggest a reduction at or before the September meeting isn’t the certainty that futures traders assume. Reports this week showed increases in retail sales and industrial production in July, while exports surged the prior month. Economists predict that revised government figures will show growth in the second quarter exceeded 4 percent.
“It’s premature to say this upset in the market is changing the course of the economy in any fundamental way,” Poole, 70, said in the interview at the bank’s St. Louis headquarters. “If the Federal Reserve were to act when it turns out there is no impact, then clearly the market would say these guys really don’t have the intelligence they need to have a policy actually based on solid evidence.”
His comments were the first by a Fed official since the U.S. central bank joined counterparts in Europe and Asia to inject emergency funds after a surge in money-market rates. The Fed has added $71 billion of reserves in the past five trading days.
Trader Bets
The yield on the September federal funds futures contract on the Chicago Board of Trade was 4.925 percent at 9:45 a.m. in New York, indicating at least a quarter-point reduction in the Fed’s target rate. The benchmark two-year Treasury note yields 4.22 percent, the furthest below the central bank’s benchmark since 2001, when policy makers were lowering rates.
Goldman Sachs Group Inc. economists said in a report yesterday that “expectations are rife in financial markets that the Federal Open Market Committee is on the verge of an emergency easing in monetary policy.” Ed McKelvey, the firm’s senior U.S. economist in New York, wrote that the absence of any rate cut suggests Poole’s comments reflect “the balance of opinion within the central bank.”
Housing `Adjustment’
Poole made his remarks after the Standard & Poor’s 500 Index dropped for a third day, erasing all of this year’s gains. The S&P 500’s 6.1 percent retreat since Aug. 8 was the biggest five- day loss since Oct. 9, 2002. The index is down 0.3 percent today, at 1,402.76 today.
Poole acknowledged that the credit-market turmoil will “stretch out” the “adjustment” in the housing industry. He said he couldn’t predict how long the downturn will last.
He also conceded that speculation Countrywide Financial Corp., the biggest U.S. home lender, may go bankrupt shows the mortgage crisis is deeper than previously thought. There is “a sort of credit crunch” in place affecting housing and some types of corporate paper, he said.
“The issue to me is whether it spread into business fixed investment or consumption,” Poole said. “I don’t see evidence that that is taking place.”
The upheaval in credit markets was caused by deepening losses on securities backed by U.S. subprime mortgages. BNP Paribas SA, France’s biggest bank, shocked investors Aug. 9 when it halted withdrawals from three funds just a week after its chief executive officer said the lender wasn’t at risk.
`Real Economy’
“I don’t see any impact as yet on the real economy or on the inflation rate,” Poole said. “Obviously, there could be an impact, but we have to rely on some real evidence.”
The argument that expansions would endure the market fallout was echoed by other policy makers around the world.
“I’m convinced these markets’ movements should not durably hurt our economies’ growth, which is robust,” French President Nicolas Sarkozy told German Chancellor Angela Merkel in a letter written yesterday and released today.
U.S. Treasury Secretary Henry Paulson said the turmoil will “extract a penalty” on U.S. growth rates, though the world’s biggest economy is strong enough to avoid a recession, the Wall Street Journal reported, citing an interview.
The FOMC said in its Aug. 7 statement that while risks to growth had increased, inflation remained the predominant concern.
Crisis of Confidence
Three days later, the central bank rushed to contain a crisis of confidence in markets, pledging to inject funds “as necessary” to steer the federal funds rate toward the 5.25 percent target.
“There’s no way the Fed is going to reduce interest rates before the meeting,” said former Fed Governor Lyle Gramley, now senior economic adviser at Stanford Group Co. in Washington. “Bill is just being realistic.”
Poole rebutted comments from some Fed watchers that the central bank may be out of touch. The criticism followed comments the St. Louis Fed leader made to reporters on July 31 that the slump in stocks was “a typical market upset.”
“We’re very much in touch with the markets,” Poole said yesterday. “We will supply more cash as necessary” to meet short-term demand for funds, he added.
Poole said he didn’t regret that the Aug. 7 statement retained a bias against inflation. He also said that while consumer price gains are “moving in the right direction,” the “job is not done.”
Inflation has slowed for four straight months under the Fed’s preferred gauge, which excludes food and energy costs. The core personal consumption expenditures price index rose 1.9 percent in June after a revised 2 percent gain in May, the Commerce Department said July 31.
Poole, who plans to retire next year, is a former economics professor at Brown University in Providence, Rhode Island.
To contact the reporters on this story: Anthony Massucci in St. Louis at amassucc@bloomberg.net ; Scott Lanman in Washington at slanman@bloomberg.net
LOOK AT FCT!
we are going down and no one will survive this unless they are in cash and pm’s.
you saw Cashin just now, the old grey-beard says Goldilocks has been running wild w Lindsay and Britney. gawd that’s a good one.
Posted by: scorpio | Aug 16, 2007 10:03:41 AM
ROFLMAO! Just blew coffee through my nose. Goldilocks is slutting around.
Whoever was sitting next to David Faber was the only one who mentioned the little guy in 2000 not being saved. He then said a rate cut would help. Unbelievable.
LOOK AT FCT!
we are going down and no one will survive this unless they are in cash and pm’s.
I meant to say very nice call yesterday, but got busy doing other things. FCT it is for looking at near term market movement. A tip of my hat to you. :>)!
commercial paper is dead people, it’s amazing the market is being held up here. over time this thing is coming down harder than maria b’s head spinning on cnbc.
i’m actually getting a bit scared.
We went through worse than this. Anyway, I’m out of all my positions (sold CAM today) and the bleeding stopped :) I still have 3 mutual funds in my portfolio, but I’m not selling those.
i don’t think you can say at this point that you’ve been through worst than this unless you were around in the 30’s. this is the start unless mr. hank pulls some golden rabbits our of his already empty hat. fed can’t rescue an already terminal situation. only thing it can do is hope for an orderly decline with plenty of exits.
looks like they have been successful so far, unless you hold a lot of paper.
this is still nothing really….and you should’nt get scared until all the talking heads are in agreement that THIS IS THE ACTUAL BOTTOM. Then run and run fast……
I think we start to see the continuation from yesterday’s close where ALOT of blocks were being flashed but not executed. Towards the close IMO
Ciao
MS
What’s truly weird is we’ve lost more money (on paper) from our retirement savings in the last few weeks than we made in the first year we were working. Feels strange to watch our net worth bob up and down in the tens of thousands, and know that we’re gaining and losing more than most Americans even HAVE in retirement savings.
I really feel for those that are losing not just money right now, but homes and jobs. I hate knowing it’s going to get way worse before it gets better again….