Last week, Wall Street crashed and seemingly soared in the end but my portfolio simulation shot up 17% in 3 days. In boxes below were the trading decisions based on the news to make this happen.
At least Wall Street seemed to be heading down the drain as the past two weeks have been a roller-coaster of a ride for the stock markets. A mixture of fear, trepidation and panic had spread through the U.S. stock market, contaminating foreign markets as well, to the extent that Russia had to close its own.
Called a financial meltdown and the greatest financial crisis since the Great Depression, all this messy outcome was predicted by Nouriel Roubini (and others) since 2006 and before. I wrote about Roubini here in March 2008, but he was only profiled in the New York Times magazine in mid-August this year.
Reuters has a good description of the timeline from Friday September 12th onward
Lehman Brothers and Merrill Lynch
In just a few days, we saw Lehman Brothers‘ stock price plunge into oblivion. Faced with a cold shoulder from the Federal Reserve and the Treasury, the only hope would have come from another Wall Street company. None moved as nobody wanted to take additional toxic financial instruments (derivatives and bad debts anyone? Warren Buffett called derivatives “financial weapons of mass destruction” in 2003) while the Libor shot up and banks mistrust of each other nearly halted the wheels of capitalism (interbank lending). The outcries against the Fed and the Treasury for bailing out companies which ultimately would have burdened taxpayers must have had some effect.
Talks with Korea Development Bank had amount to nothing for Lehman…
Trade: short Lehman
Bail outs
However, one cannot say either the Fed or the Treasury have been consistent:
- Bear Stearns – bailed out
- Fannie Mae – bailed out (normal)
- Freddie Mac – bailed out (normal)
- Lehman – no bail out
- A.I.G. – Stress, Fear, Panic, Headlines, stock plunge, talks…bailed out
Reuters has a special coverage of the credit crisis with a graphical representation of the bail-out timeline for this year.
Merrill Lynch, Goldman Sachs, Morgan Stanley
During the same week-end that Lehman filed for Bankruptcy, Merrill scrambled to sell itself to Bank of America. At this point, many observers had started to speculate on which big bank would be next, probably echoing Nouriel Roubini’s initial analysis. In fact, some pointed out that the very business model of the broker-dealer was fundamentally flawed and that the two remaining big investment banks, Goldman Sachs (GS) as well as Morgan Stanley (MS) would have to find partners (possibly in commercial banks) to stay afloat.
Despite prompt statements from both GS and MS as to their good standing, their stock quotes plunged… and kept plunging. GS went from $140 a share to sub-$100 levels for a short time. MS fell from $30 to sub-$12 levels.
Trade: short Goldman Sachs, short Morgan Stanley. With the profits from the cover, buy Arch Coal, Potash, Barrick Gold for the long run
The short-seller witch-hunt
On Thursday, the U.K. bans all short-selling. The next day, the U.S. follow suit.
Of course, according to the regulators, it must be the fault of those short sellers, naked or not, those secretive Hedge Funds and not the fault of the people who lied when selling derivatives and bad debts.
Paul Kedrosky shoots this argument down with a few figures.
Privatization of profits and socialization of losses – the mother of all bail-outs
The Treasury announces a 700-billion bail-out plan and advocates creating a new entity to absorb all the toxic instruments and bad debts that financial institutions carry. Well, actually the Fed will print the money (indexed on nothing – the Dollar will crash and gold will rise) and sell it to the government. Ultimately, it will be the tax-payer who will foot the bill and the interests.
This is why, as Roubini and others observed, the profits are privatized and go to a select few, but all the mistakes and losses are socialized – propagated to the tax-payers.
To quote Roubini:
First, note that the Fed and the Treasury claimed to draw a line in the sand on moral hazard with their decision not to bail out Lehman ; but two days later the financial tsunami of the century wiped out that line and led to the continuation of the mother of all moral hazard bailouts with the nationalization of AIG.
Roger Ehrenberg echoes this view on Seeking Alpha.
From Reuters:
Friday Sept 19:
- The U.S. Securities and Exchange Commission issues an emergency order temporarily banning short-selling in shares of about 799 financial institutions to calm the financial markets. The measure is set to end on October 2, but can be extended for an additional 10 days;
- The FTSE rises 8.8 percent, its biggest surge ever;
- Market watchdogs in France, Portugal and Ireland take similar steps to crack down on short-selling.Saturday, Sept 20:
- The Bush administration proposes a $700 billion bailout of financial markets crippled by the crisis. The legislation would give the Treasury Department authority to buy a wide range of illiquid assets from banks, but specifics of the proposal remain unclear and subject to negotiation.
Around the world, headlines read: “Markets ’soar’”
Trade: buy Freddie Mac and Fannie Mae, Citigroup, Morgan Stanley, UBS.
Result: from -7.14% to +9.85%, i.e. +17% in 3 days. However, this market is highly volatile, and fear-based. Anything can happen.
Recent Comments