Category Archive

We have seen the worst excesses in credit markets history. Let the competent banks take over the incompetent banks. Everybody starts over.

—Jim Rogers

Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay holders 91.375 cents on the dollar, setting up the biggest-ever payout in the $55 trillion market.

The ISDA organized auction on creditfixings.com set a value of 8.625 cents on the dollar for the debt.

BNP estimates payments of more than $270b, as a result

The market for the bonds had implied a recovery rate of 13 cents on the dollar, which would be a 33% difference or 4.75 cents on the dollar.

There are more than 350 counterparties involved.

“[The payments] are insignificant when put into the context of the trillions of dollars of payments that are made through settlement systems each and every day”

—Robert Pickel, head of the ISDA

[The stock market is a] billion-person game in which people are trying to figure out what everybody else is expecting and therefore how everybody else will behave.

[What we are seeing is a] psychological rather than an economic phenomenon

I’m not altogether confident that the people in charge know what they are doing. But they sure are trying hard.

It’s crucial that people believe that help is on the way and solutions are possible. If everybody thinks the stock market is going to crash, they behave in a way that makes it crash.

—Thomas Schelling

DJIA Fundamentals, as of 30 September 2008 — 10,850.66

• TTM P/E: 15.68
• TTM Dividend Yield: 2.96
• TTM Price / Cash Flow: 7.64

What’s the DJIA down Month To Date?

• 15%?
  • TTM P/E: 13.3
  • TTM Dividend Yield: 3.5
  • TTM Price / Cash Flow: 6.5

S&P Fundamentals, as of 30 September 2008 — Price: 1166.36

• Estimated TTM P/E: 20.83 – (bottom up, operating earnings)
• Estimated TTM P/E: 16.14 – (top down, as reported)
• TTM Dividend Yield: 2.47

What’s the S&P down Month To Date?

• 25%?
  • TTM P/E – bottom up: 15.6
  • TTM P/E – top down: 12.1
  • TTM Dividend Yield: 3.3

Case/Shiller data for the NY Metro Area shows the following:

• Prior Peak
  • We peaked in September 1988 at 85.54
  • We bottomed in April 1991 at 72.29, a drop of 15.5%
  • We climbed next hit the prior peak of the index of 85.54 in May of 1998, an 18% gain, officially passing it in June of 1998 at a 2.4% CAGR
• The index is anchored at January 2000 at 100
• Our Current Peak
  • It peaked at 215.83 in June 2006, a 116% increase from January 2000 and a CAGR or 12.6% and a 7.6% CAGR from the prior trough
  • The last reading is 192.92 for July, which is 10.6% off the peak and would represent an 8% CAGR from 2000 and a 5.9% CAGR from the prior trough
    • A reading of 150 in May 2009 would yield a 4.1% CAGR from the prior trough

    • Futures are pricing

      • A reading of 179 in May 2009, which would yield a 5.2% CAGR

      • A reading of 162 in May 2010, which would yield 4.3% CAGR

Outflows:

• Year through August – Stocks: $72b pulled from stock funds this year, 1.3 percent of assets, according to Brian Reid, chief economist at Investment Company Institute
• September – Stocks & Bonds: $72b from U.S.-managed stock and bond mutual funds in September. $43.5b from stock funds last month and $28.8 billion from bond funds, according to TrimTabs Investment Research
• October – Stocks & Bonds: $49.3b of outflows have been tracked in the first week
• YTD, Stocks – [Blended Data]: September [$43.5b] + October [2/3*$49.3=$33b] + YT-August [$72b] = $146b

People are scared. This market is different from what we’ve seen before.

–Conrad Gann, TrimTabs’ COO

Saved by the Deficit?
By ROBERT B. REICH
Published: October 9, 2008 
If the nation plunges into a deeper recession, the deficit will be even larger as a proportion of the economy. Yet all is not what it seems.

•  January 1993 compared to January 2009 — Clinton coming into office with a 5% deficit, vs the pending president elect coming into office with a 3.3% deficit (of GDP). Similarly, in January of 1993, we saw the emergence of an economic recovery, vs our present situation
• The impact of the $700b bailout rescue on the deficit, increasing it to 6%, and role as an investment, not an expense
• The appetite for deficit spending in the coming year to handle the economic uncertainty and deepening recession through investment, employment, and spending of last resort.

I don’t see a wave of liquidity coming into the market. People are still holding on to their cash because there’s still a great deal of uncertainty out there

—Alessandro Tentori, an interest-rate strategist in London at BNP Paribas SA

Policy makers want to get as much stimulus into the system as soon as possible.

—Brian Sack, a former Fed economist at Macroeconomic Advisers

It’s going to take a while to work through this problem. Some financial institutions will fail.

—Paulson

We had a bad banking situation. Some of our bankers had shown themselves either incompetent or dishonest in their handling of the people’s funds. They had used the money entrusted to them in speculations and unwise loans. This was of course not true in the vast majority of our banks but it was true in enough of them to shock the people for a time into a sense of insecurity and to put them into a frame of mind where they did not differentiate, but seemed to assume that the acts of a comparative few had tainted them all. It was the Government’s job to straighten out this situation and do it as quickly as possible — and the job is being performed.

…

After all there is an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people. Confidence and courage are the essentials of success in carrying out our plan. You people must have faith; you must not be stampeded by rumors or guesses. Let us unite in banishing fear. We have provided the machinery to restore our financial system; it is up to you to support and make it work.

—FDR

I have to say that the news on today’s Bloomberg that Iceland was negotiating a $5.4 billion stabilization loan with Russia did not fill me with a sense of comfort about the political implications and the ways in which the world is moving.

—Former U.S. Treasury Secretary Larry Summers

This is going to be a longer recession than the last four, over three decades, where the average duration was about 12 months. I think it is going to be deeper in terms of decline.

—Marty Feldstein

Rate cuts, federal funds cuts, are not going to be enough

—Hans Genberg, the executive director for research at the Hong Kong Monetary Authority

The key lesson is when you face a confidence issue where the market participants no longer trust each other, the conventional macroeconomic tools are not as effective.

—Olaf Unteroberdoerster, International Monetary Fund, Hong Kong