I was quite excited when I saw the Dow crossing 9000 on Jan 1st 2009. However, I was also cognisant of the fact that very thin volume was responsible for why the market was looking so promising: the first Monday of January (the 5th) was considered to be the real start to the New Year as traders had taken the last few weeks of December and the first few days of January off (coincidentally so had the gloom in the market). Since then things have looked anything but promising. The reason why I am summarizing the events of this month is that it is a harbinger of what lies ahead. The ‘January effect’ states that the first 30 days of January dictate the general trend of the market 90.4% of the time. As the markets closed on Friday, we recorded the worst January to date. Here is to hoping that this year falls into the 9.6% where the theory is off.
If you are as frustrated as the I am with the current situation the the Guardian offers some catharsis by pointing fingers at a few of the major players “responsible for” the financial crisis. Though, I do not entirely agree with some views proffered, it does make for some interesting reading.
The Economy
I pity the fool who thinks the nationalization will be the answer to all our problems. With Britain buying a majority stake in the Royal bank of Scotland and speculation that Lloyd’s and Barclays may follow, the pundits feel that nationalization is the answer to alleviating the troubles of banks today. I beg to differ!
The fact that the government will be running banks is a thought scarier than a slumber party at the Neverland ranch. There are around 8000 banks in the United States today. It will be close to impossible for one body (in this case the government) to run such a large-scale operation. One does not have to look any further than the DMV or the US postal service to see the “efficiency” with which the government runs its large operations.
All things aside, on a fundamental basis the nationalization of Wall Street seems like a huge mistake. What makes Wall Street so amazing is the collection of brilliant minds that can make magic happen (using the free market as a catalyst). Good or bad, what the investment banker can do is truly amazing. (Before you start rolling your eyes and muttering about people being overpaid, please take a look at a GM assembly line employee who gets paid $90,000 for relatively simple work (with full benefits of course). I digress. What makes Wall Street special is its competitive landscape and innovative thinking. Currently the government has already tied the banks’ hands behind their backs by: moderating bonuses, having the last say on the major capital (expenditure) decisions, controlling dividends and regulating the amount of leverage a bank can take on. Nationalization will be the final blow that will take the wind out of Wall Street’s sails.
You may think that it is not a big deal as financials are no longer as important as they once were. A few years ago financial stocks accounted for over twenty percent of the market cap of the S & P 500. Now they have dwindled down to roughly ten percent. Though the size of the market cap may have diminished the effect on the market, if anything it has grown. In short, financials are without a doubt the trendsetter for the market. (Simply put, the market more or less moves up or down depending on how financials perform on that day.) I will be the first to admit that the condition of the economy is a worrying and that the government has a lot on its plate. However, a bigger role by the government (with little or no technical expertise in the field) is absolutely not the answer to these problems.
Update, Jan 26th: The New York Times has published an insightful article discussing both the pros and cons of nationalization.
Politics, The Economy
(The title seemed appropriate with the current state of affairs and the new B.I.G movie being released)
The government has offered to bail out Bank of America for a second time (helping them to be true to their name and really becoming America’s bank – using the tax payer’s money of course). The reason is simple: they did not expect Merrill to be this hard to digest. (Question, what do you expect with 48 hours of due diligence?)
Citibank is set to split up to form Citicorp and Citi holdings. To put it in simple terms, the former is the ‘good bank’ that will handle the traditional banking work, while the latter will take the role of the ‘bad bank’ and manage the firms riskiest assets. Citi is also selling one of its most profitable divisions, (its brokerage unit Smith Barney) to Morgan Stanley (I like the name Citi–Morg for the company). Furthermore, CitiGroup is planning to eventually cut down to be half or even one third of its current size. Food for thought: will Citi still be considered too big to fail and get continuous support from the US tax payer (as BOA has managed thus far)?
Seeing the conditions of banks one cannot help but agree with Mohamed El Eriam (co-head of PIMCO) that banks are just as good (or bad) as utility stocks.
If you have 15 minutes to spend, I highly recommend playing ‘ the bailout game’
Highlights for this week:
America swears in its 44th president. Though I am excited to see history being made, I am especially excited to see if treasury secretary Geitner will actually go through with his suggestion to let banks move from mark to market accounting to mark to model accounting. This should help banks improve their balance sheets as they will be able to put a reasonable value on assets that do not have a market.
Tech companies will be revealing earnings this week. I have to say I am more excited about the conference calls that will follow. I want to see what Apple has to say after their dismal handling of affairs regarding Steve Jobs health. What will their future guidance be with him on extended leave? Will Microsoft shed light on pursuing Yahoo, now that a new CEO is in place and finally will Google continue to show its resilience as a top firm.
Note: The Maddof scandal, bailouts and depressed condition of the economy makes us all feel like there are a lot of things wrong with the world. However, the spirit of the New Yorkers in aiding the US airways rescue mission and the courage of the pilot reassures you that there is still some good in the world.
Politics, The Economy
Economic news in 2008 was a lot like Facebook: it was everywhere you looked, painfully annoying (there are only so many times I can take being ‘poked’ or invited to join ‘zombie wars’), yet informative and ridiculously addictive.
Thus far the markets have been slow while traders cut their losses and stay on the sidelines, licking the wounds they incurred during the course of the past year. We keep hearing the pundits talk about how this situation is unprecedented and though it was a tumultuous market, the silver lining is the learning experience. Though that may be a great spin on the issue, do we ever learn?
The stock market crash of 1987, the Japanese meltdown of 1990, the bond market debacle of 1994 and the bursting of the tech bubble in 2000 all share a common theme: Wall Street, the government and the public were all taken “by surprise” because they ignored market signals about taking excessive risk, or in the words or Schiller irrational exuberance, resulting in “unexpected” and disastrous market conditions. In each case the excuse was that the current situation is “different”. The market felt (and arguably still feels) that it always knew more than it did the last time.
Another character flaw haunting us today is the heavy reliance on assumptions. We have come to assume that the Fed will bail us out, that unforeseen events (black swans) only come in the form of terrorist attacks or insider trading but not from over leveraging, that the current technology and understanding of the market will avert any crisis and that the governing bodies are watching over us like a hawk (and will protect us against Ponze schemes like the Madoff debacle).
The government and Wall Street assured us that junk bonds would not be used to over leverage positions after the explosion of junk bonds in the late 80s. They vowed that the bond market collapse of ’94 would never reoccur and that we would never witness the a bubble like the tech bubble of the late 90′s. In 2008 the housing bubble burst and bonds have come to haunt us once again, this time in the form of CDOs. Will we ever learn? Many words come to mind when describing 2008. Meltdown, catastrophic and irrational are a few good ones to start with. Lets try and add learning experience to the list.
Happy 2009 everybody!
The Economy
