The New Definition of Market Capitulation
Simply put, the new definition of capitulation is not when the investor has given up all hope and is selling off all its equity, it is when the global Central Banks and the Fed simply throw up their hands and pronounce this is a once-in-a-lifetime catastrophe, and will throw in the kitchen sink.
Investors now need to fear selling stocks and missing out in the rubber band snap of an oversold market that could potentially happen with a unified global commitment to halt the bloodletting.
What can the global Central Banks do?
- G-7 meetings start tomorrow - they can blanket guarantee ALL interbank lending. That means banks can lend to other banks and be assured their money is safe in sudden bankruptcy. Radical, but everybody antes up to make sure their poker game doesn't collapse.
- Take bold action. Yes, rate cuts may not be the panacea at all, but yesterday's chickensh*t 50bp rate cut gave investors the impression the global Central Banks were clueless. Today, the Fed's plan to inject capital into the banks through equity purchase had no effect in a near-record loss day. The continuing market crash mirrors a call for more help. Drop rates even more as a symbolic move to capitulation as defined above. If the European finance ministers are still in paralysis, Bernanke should act alone.
The Fed is likely to eventually lower its key rate from 1.5% to 0.5%,
said Julian Jessop, chief international economist at Capital Economics,
in a research note. He sees the bank of England dropping its key rate
from 4.5% to 2.5% or lower, while the European Central Bank is seen
moving its key rate from 4.75% to 2%.
Marketwatch 10/9/08 - More action needed.
Just do it!
Marketwatch 10/9/08 - More action needed.
Just do it!
Forget the stock markets look at the credit markets. I'm hiding in my bunker right now (only half joking).
* 3 Month LIBOR has skyrocketed to 4.75%, 4.5% yesterday and around 4% the day before.
* TED spread blowing out to 4.5%, Eeeekkkk
* Long bonds getting sold hard at the same time stocks are tanking, which you should not see happening.
Only one or two more days of this in the credit markets and companies are going to start dropping dead in mass.
As far as the central banks, they have totally lost control of the situation at this point. Rate cuts mean absolutely nothing if the banks won't lend period, which is what is happening now. The issue is trust not liquidity.
Assuming the credit markets don't blow the whole financial system sky high in the next couple days, I expect a massive snap back rally in equities. Particularly after too many over anxious shorts piled into financials today after the ban was lifted. This snap back may last several months but we're far from the long term bottom during the bear market.
Full disclosure:
As a trader myself, I finally am 100% out of my short positions in equities as of this afternoon and even took a some small long positions at close. Still increasing my short positions on the long end of the yield curve though. The governments insane policy actions are very likely to cause a 1930's, style bond market collapse in the coming months.
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Matt, you are completely correct, and your dire observation that a few more days of this credit crisis can tank corporations - one car company is ready to go under - is consistent with what I think. The market cannot "correct" this credit crisis despite what free market advocates have been professing. So it's really the governments that must act... I know rate cuts won't work, but a blanket guarantee on interbank lending to usher in reasonable TED spreads seems like the "final solution", to put it bleakly. Again, Paulson and Bernanke sounded the death knell alert three weeks ago, and one by one... Congress, Central Banks began to get the magnitude of the crisis. Imagine what shape we would be in now if each of the inevitable corrective measures weren't put in place over the past three weeks... the tanking would have happened a lot faster and more dangerously. The last three weeks have already put is in critical... I'm almost relieved today was chaos, it's time for the world to get focused and stop dithering.
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The "protective" measures they put in place are actually a key cause of the speed at which the crisis is spreading. The bond market dislocations were CAUSED by the bailout package and the backing the commercial paper market. There policies are akin to trying to trying to cure an alcoholic by giving him another drink.
Bernanke claims to be a student of the depression but the steps the FED and Treasury have taken are literally following a roadmap of the policy mistakes made that lead to both the great depression and several other major 20th century financial collapses.
More I wrote on this subject a week or two ago, along with what I believe is or rather was the road to preventing a financial collapse.
http://activerain.com/blogsview/715142/Monday-Bailout-Comments-and
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Thank you Matt.
Bailout Backfire and the Ticking Debt Time Bomb comes close to what you argue... author Blackman implies each bailout (drink) starting with Bear Stearns revived the alcoholic, but inevitably, the string of bailouts led us down this road to reckoning today.
Bernanke & Co. treated each episode (binge) tactically with a quick fix that didn't tackle the strategic problem of the credit dysfunction. Your prescient proposal to attack the systemic problems from your article on September 29 made sense when I read them earlier, and in fact Paulson is now proposing using the bailout funds for recaps. The new final bailout also increased FDIC deposit protections to $250k.
However, what you were proposing on September 29 was essentially a long term project... recaps can't be done in this market when there are no investors (look around, the Fed first had to backstop Citi to purchase Wachovia, and Wells Fargo waltzed in due to tax credits offered by the new bailout), and changing accounting roles is essentially passive when there is no time for the "audit".
I still stand that a long term project would never have stood the test of time and the fall would have been much more dramatic had the bailout not passed... the Dow would have dropped to the same level it is today within a few days. Letting everything fail doesn't prevent financial collapse, it is financial collapse. Bernanke needed to do what you proposed last summer to be effective. It's too little, too late.
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The policy auctions actually go back to last August with an engineered "stealth" bailout of Countrywide by the FED. Instead of dealing with the problems, we propped failing institutions up creating a larger systematic risk. During the last year many of the institutions that would have otherwise failed were allowed to further increase leverage and create a much larger systematic risk entangling themselves with healthy institutions to survive. Just look at the explosion of CDS contracts in the last year as evidence of the entanglement.
Fed lending facilities like the TAF along with massive liquidity injections of all types over the last 14 months allowed sick and dying institutions to live and infect the rest of the system. The policy was undertaken to attempt to avoid the necessary correction at all cost, and that decision has led us to the precipice we're at now.
No one knows who's hiding the bombs now, who's solvent and who's not. How many times have you heard a CEO claim their company is solvent and liquid only to see it explode the next week and find in the aftermath they were actually insolvent by a wide margin. This has lead to credit being cut off to healthy institutions out of fear. The only solution to get us out of this is to expose the problem institutions and quarantine them from the rest of the financial system, so that trust can be rebuilt, and private lending can be restarted. Unfortunately, I worry the event horizon has now been passed, and we are facing what could be politely referred to as a "reset" of our financial system.
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You make a very valid point that the bailouts just moved toxic debt around that was covered by a burgeoning CDS market (Credit Default Swaps are figuratively but not legally insurance to cover defaulted debt).
From FT Oct. 6
The next test will be the unwinding of CDS linked to Lehman, which filed for bankruptcy three weeks ago. Michael Hampden-Turner, a credit strategist at Citi, estimates that there could be $400bn of credit derivatives referenced to Lehman.
These contracts will be settled on Friday, and with the recovery value on Lehman bonds currently estimated at about 10 cents on the dollar, the pay-out by banks and other sellers of credit protection on Lehman could reach a gross $360bn.
The WSJ article on the Lehman CDS unwind.And of course, the plague has moved into Sovereign CDS with the insolvency of Iceland's banks and difficulty to get short term financing for state deficits as in California.
Again, the event horizon for the how to unwind of this toxic debt just happens to be occurring over the last three weeks.
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Yea, it was a bloody day on wallstreet today and I think it is going to only get worse. I beleive that some of this fear is because the public has no confidence in either candidate. Both these guys are lying to the public and neither has a clue how to fix this mess.
Unfortunately I see the Dow getting below 7000. Time will tell.
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The cleansing of the stock markets although painful is a ultimately a good thing.
I am more considered about the credit markets and inter bank lending.
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Well this was one great discusson
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