It has to sometime--why not yesterday?
The chatter on Bloomberg is the most optimistic I've heard in a long while. And Vikram Pandit sounds positively giddy with the news that Citigroup was profitable in January and February; his stock is up more than 40% on the news, which would be more impressive if that didn't represent a gain of less than 50 cents per share.
But as traders say, even a dead cat will bounce if you drop it from high enough. I'd put my money on short covering before I'd bet on a bottom.
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
Why does everybody talk about bouncing dead cats? Has anyone ever actually tried dropping a dead cat to see how high it would bounce? Or is this just more evidence that economics in not a real science, like physics.
We had the end of the year bounce and have seen how that turned out. Does anyone really think Citgroup is all better? Or that Pandit isn't engaged in some Jim Cramer-like nonsensical hype?
I've had a long-standing bet for a lunch at Chipotle with a co-worker that the market bottom would be above 6300
I had been planning on paying out that bet this week, but this works too!
Why should anyone care whether you think it is short-covering? I mean sorry, but WTF do you know about market timing?
SP500 will hit 750 within 2 weeks. It'll stall between there and 800. Back to 675 within a month and a half.
That's the easy part, after that????
It will be interesting to see what the the QI GDP figures are. I shudder to think of the trouble we're in for if the economy's shrinkage accelerated from its QIV pace, but most of the guesstimates I've seen predict it'll come in at somewhere around negative 3.5%. While that's not exactly a boom, it would be an improvement over the end of 2008, and should such a number materialize it would at least suggest the bottom of the recession is behind us, and that, judging from the geometry of past slides (including '29-'33), growth (tepid as it will be at first) will resume in late 2009. I wouldn't be shocked if it takes a quarter or two for recovery to take hold -- and I wouldn't rule out a negative quarter following the resumption of growth. My own guess would be for this recession to officially be dated to end in February 2010. Anyway, perhaps markets will begin to anticipate the resumption of growth, and we will see a rally. I doubt it's the beginning of a secular bull, however. More likely a bear rally. Megan, why don't you start a prediction pool dating the recession?
wiredog: a skydiver does indeed bounce when his parachute fails to open. The scale factor of a cat to a human is about 0.25 to 0.3, the weight is proportional to cube of the linear size, the turbulent drag is proportional to square -- and to the square of velocity. This gives us a terminal velocity of about half that of a skydiver. I say it'll still be high enough to bounce.
Nothing like a morbid discussion to brighten the day!
Coming up on Mythbusters... = ))
Vikram Pandit is giddy that they were profitable?
No kidding, he promised Congress that he would work for $1 until the bank was profitable again. He can go back to collecting millions, with no delay.
I think this is at least a short-term turn in sentiment. It came to me over the weekend as I watched a few videos of stock analysts calling for a bottom in 3-4 months. That kind or unanimity should mean a bottom now. So I actually planed on buying (nibbling) today, but I won't on an up day. I'm too stubborn.
So I'll predict a SP500 kick to 900 and then a new test of the lows.c
There were bear market rallies from the 1974 debacle, and the 1938 debacle, and secular bull markets didn't begin for many more years. The behavior of Geithner and Co. makes me think that not all the bad news has been discounted, which makes me think that we have not yet hit bottom, or at least that it is very unlikely that we will get to a bull market in less than a pretty long time.
This market has been super-volatile since the fall 1998 correction. It is so desperate for good news, this day looks more like an anomaly than the day after we hit bottom. With the IMF now calling this a 'great recession' (wha?) we can't expect any market to lead us out of a global deflationary recession, where the major economies are up to their gills in debt.
The bottom could be a two year trench the way this was looking last week.
If you bought an index in 1929 and held, you would not have been nominally even until 1958. Our secular bear market started in 2000, and it will not be over for some time to come. We have gone down over 50% from peak with only small bear market rallies. We are due for a big one. It could last several months, and the gang at CNBC will scream bottom. But we're not there -- long term valuation says that stocks may be cheap, but they have not approached the kind of levels that have marked long term bottoms in the past. Besides, what is there to get excited about in the economy? The only chance is this is a nominal bottom because inflation and perhaps hyper-inflation is on its way, courtesy of quantitative easing. It is not the real bottom.
"There were bear market rallies from the 1974 debacle, and the 1938 debacle, and secular bull markets didn't begin for many more years."
Secular bear markets tend to last about as long as the secular bulls that preceded them, e.g., the 1966-1982 secular bear followed the 1950-1966 secular bull. Since we had a secular bull market from 1982-2000, we probably won't have another secular bull market for another 7-10 years. We will have cyclical bull (and bear) markets between now and then though.
Who knows -- it looks like just another bear market rally. I'm not too excited about buying. Nothing has changed fundamentally.
I grew up in a kind of rural dystopia where, as a child, I saw actual dead cats bouncing. Yes, more than one.
Personally, I am far more interested in the question of whether a live cat bounces when dropped from a great height.
Maybe you should think back to your previous predictive powers. I don't know if the market has bottomed, but if earnings have, and since the 4th quarter of this year will have extremely easy comps with the 4th quarter of last year, if the market doesn't get back to this level by october of this year, I will then think the market has bottomed. Lots of ifs there, but isn't investing about taking calculated risk? It is a lot easier to make money at Dow 6500 than dow 14000.
Do you suppose Citi's profits will all come from lowering the value on its debt? Several institutions have reported quarters that consisted *entirely* of those FAS 157 adjustments. MS for instance, two or three quarters back. Citi's debt is still in junk-land.
I can't imagine the asset write-downs aren't continuing, apart from the $300B they stuffed to taxpayers.
Re: This gives us a terminal velocity of about half that of a skydiver.
Odd tidbit I recall from physics class: a falling human (in a calm atmosphere) maxes out at 120 mph; a falling cat at 60 mph. So you're right.
Personally, I am far more interested in the question of whether a live cat bounces when dropped from a great height.
The cat's alive on the way down, just not at the bounce.
Re cats: Actually, as I recall, cats falling up to about 2 stories tend to be OK; from 3-7 stories they are killed by impact; above 7 stories they relax and spread out more, catching more air and so slowing down, so they survive. There are stereotypical injuries, though, usually resulting from chin impact on the ground.
What time frame? Long term bottom? 10 years give or take? I guess we will find out on the retest.
So far we have not gotten over last weeks high.
Players are beside themselves with glee over the rumored demise of Mark to Market accounting. Com men absolutely in love with a good con. After all, that's what confidence is all about.
My new group, Citizens for Fair Accounting is asking congress to take up our proposal. Allowing all citizens to depost Lotto tickets in their bank accounts and be able to draw up to one million dollars against the 'value' of their winnings.
Warren Buffet in his interview yesterday, as linked by Althouse or Instapundit, apparently thinks the banks can 'earn there way out of trouble.' Samuel Johnson at MIT apparently thinks Geithner is in denial and 'nationalization' etc. Becker-Posner has an interesting suggestion in re: 'too big to fail' which is, because of the externalities of potential failure, the bigger banks should, after the present crisis resolves, be required to have larger capital ratios.
Who really knows? It is always said that the bottom is only known in hindsight. Color me skeptical about today's rally- and I and a host of others will be watching for Citi's next, official, earnings report, and if it is a loss, the Pandit had better have already left for Aruba.
My 401(k) really hopes it's the bottom, but I don't see how that's possible. We don't even know how bad the profit picture is.
Dead cat bounce, IMO.
People have been talking about hitting the bottom every time the market bounced. There's no reason to believe this is the bottom any more than there was the other times. The fact that it could react so wildly to an unaudited "pep rally" style internal memo from Citibank just shows how desperate people are for good news. Another great short opportunity coming up.
rapier,
Question - Lets say I own 10 commercial buildings each worth 10 million. They are all leased to the government with 20 years leases. After all the overhead is covered - taxes, maintaince, security, etc. the buildings generate a profit of $1,000,000 a quarter.
Are you saying if the real estate market declines by 20% I need to report a loss of $20,000,000. And then when the market recovers I report a gain of $20,000,000? Shouldn't I only record the gain or loss when I sell a building and in the meantime only report the cashflow...?
I guess I can see both forms of accounting as being open to abuse.
Short covering, spoken like a true non trader flexing unimpressive market analsysis bona fides.
Great work!
k1
In keeping with the animal bouncing, a cool fact is that certain animals (like hamsters and ants, if I remember correctly) won't die if simply dropped from any reasonable height. Their terminal velocity due to the size, shape and drag characteristics prevent them from falling fast enough to ensure death.
JMO you seem to be mixing up real assets with the debt based financial assets, which are the banks problem.
The specific example is particularly non representative. In that example the property would be worth at sale far more then the majority other commercial properties because of the guaranteed cap rate. So its value would not drop with the market average. Even if it did decline an absurd amount in a panic you have your cash flow, which is exactly the reason a true capitalist should buy an asset. For expected positive cash flow. If you buy anything strictly for the chance of asset appreciation, asset inflation, that is speculation. Excess speculation using leverage is the foundation of our problem
Which has zero to do with the troubled bank assets.
PS
The example has zero to do with our problem.
Rapier,
But the vast majority, upwards of 80%, of the mortgages are still performing and are still backed by actual homes. How do you value an asset that is still generating cashflow..?
Should you discount it when the mortgage goes into default - when it goes into foreclosure - when it is finally sold?
Merril as I recall sold some of it's CDO's at 21.8 cents on the dollar. I assume those who bought them felt they were likely to recover an amount significantly higher than 21.8 cents?
I think this has everything to do with the problem at hand.
Well a residential home does not generate cash flow. It is not intended to generate cash flow. I don't want to sound dismissive but your commercial property example was an extreme apples and oranges thing.
It is the MBS that is supposed to generate cash flow. Not the home. When a mortgage is defaulted on that mortgages price becomes zero.
The Merrill example, 20 cents on the dollar is great. It is the market clearing price. If buyers for every bad MBS could be found then the market would clear and we would be at a place where the firm foundation of a recovery could happen.
One problem. If banks sold them at the market clearing price or even valued them at the market clearing price they would be bankrupt. The losses huge. The entire bailout scheme is aimed at not realizing the losses. To somehow hope the clearing price comes back up to make everything whole.
I know this goes round and round.
In order to save the current system we have to cheat, and then hope.
rapier,
"If banks sold them at the market clearing price or even valued them at the market clearing price they would be bankrupt. The losses huge."
How would you arrive at the market clearing price? You can't dump all the MBS on the market at the same time.
Let us say that Berkshire Hathaway owns 100,000,000 shares of coke. How much is that worth? As of today it is worth $3.9 billion.
Really?
So, if tomorrow BH put in a sell order for 100,000,000 shares of KO at 39.16 they would get $3.9 billion? No, if they tried to sell all at once the price would plunge. Same with MBS.
The banks need to sell but to dump all the MBS's on the market at the same time would be the hight of insanity. What they need is for the Treasury and the Fed to provide temopary liquidy as they positions are unwound in a timely manner.
Rapier,
I guess my question is how would you arrive at the market clearing price?
Would you make all the banks offer their MBSs for sale in some sort of auction? I just like to know how your plan would be implemented.
The big banks really screwed the conservative small banks by using the specter of system-wide collapse to force all banks to take a one-time charge and shore up the FDIC reserve fund. Conservative banks with relatively large reserves were hit just as much as the highly levered. It amounted to a huge wealth transfer from the winners to the losers. That kind of crap will come back to haunt us all.
This is not a bottom. It's a dead cat bounce. It may go higher before resuming the circling of the drain, but there is no way that rewarding failure will produce success.
What is temporary liquidity? It's fairy tale stuff. Magical thinking.
I recommend Geithner buy one of these.
http://www.hazelnutkids.com/cgi-bin/item/NS004/playsilks/North-Star-Toys-Magic-Wand
rapier,
You didn't answer my question. Under your plan how would the banks determine the market clearing price?
"the vast majority, upwards of 80%, of the mortgages are still performing and are still backed by actual homes. How do you value an asset that is still generating cashflow..?"
Do the math. eighty percent of mortgages generate pehaps 5% profit: .8 X .5 = 4%
20% of loans result in forclosure and 50% losses.
.2 X .5= 10% loss
4% - 10% = -6%
The MBSs have a net negative value. They are liabilities, not assets.
"how would you arrive at the market clearing price?"
um, how is this not completely elementary? You put up these things for auction. If the sell, the sale price is the market clearing price. If they don't sell, they are a write-off. Duh.
Sheesh, I apologize for hijacking this thread.
What plan? I don't have a plan.
Banks can't "determine" a clearing price. Markets do.
It is all kind of funny, that I, a socialist for all intents and purposes on today's scale, have to explain and defend markets.
BSpock,
You've just subtracted a one time loss from a yearly profit.
But I do think there is more bad news to come, just because the treasury and central banks are behaving like there is more bad news to come.
There are two arguments against this:
1. Saddam Hussein was behaving like he had weapons of mass destruction.
2. Megan called the oil price peak almost exactly.
In conclusion, I'm investing in the Chinese pharma industry.
You're right of course, Pat, but there still are some serious negative cash flow issues. If you have negative cash flow on a depreciating asset, that's about as close to a liability as you can get.
Your empty houses still accumulate property tax liabilities and deferred maintenance.
When the percentage of loans perform is shrinking and the value of the collateral is shrinking, and the cost of servicing the loan barely covers expenses, it becomes possible that the next year's profit is the only profit you will ever see.
Ok Obamaphiles, put down the hope, change, and centrally-planned government share of koolaid and understand this: The rally of 10 March 2009 is a sucker's rally, a dead-cat-bounce, and certain way to lose money if you foolishly invest now.
I listened to the supposedly crazy Jim Cramer, Roubini, and Meredith Whitney and sold all of my 401(k) and took a mere 20% loss on the whole and converted to cash 100%. I side-stepped an additional 50-60% in losses. We are not done going down. We have a lot to go. We will hit bottom around 5,000 to 5,320. I don't care what your leftist champions say, what you hope, what you falsely believe in. Do not invest your money now. Don't be a fool. We can rally together much later in Obama's circus. Now is not the time.
2.7 Trillion in write downs from banks yet to come. Viktor may say he has a profit today, but come the end of the quarter, he will show massive write down losses yet again. There is no way he has enough positive cash flow to handle all of the losses he is taking.
Does anyone not see the continued pressure all of these job losses will put on mortgages? Does anyone not believe that 650,000+ jobs lost last month will have no effect on thousands of mortgages round the country?
Have any of you looked at credit spreads lately? Have any of you looked into the problems in commercial real estate?
It is widely accepted street-wisdom that the market predicts economic conditions 6-8 months out. Please, none of you be so foolish as to think that currently accelerating job losses equates to a bottom 6-8 months from now. Don't be fools. Stay safe, stay in cash or bonds. We'll move back in when the smoke clears, not because something Viktor said, who clearly has an agenda, an interest in keeping his penny-stock company afloat until next government sponsored hand out, and because Europe got giddy for a split second.
FDIC Chairwoman Sheila Bair announced last week that the quasi-public insurance monopoly would become insolvent in the next few months if it is not allowed to implement a one-time, draconian surcharge on all U.S. banks. This charge will, in some cases, wipe out last year’s profits. At the same time, the FDIC has requested an additional $500 billion "loan" to from Congress.
Small, solvent, well-run local and regional banks have objected. They rightly claim that they are not the problem. These banks have a solid and growing deposit base and many of them service their own loans and so did not get caught in the trap of originating bad loans and dumping them on the secondary mortgage market in federally-guaranteed bundles. Whether they know it or not, these banks intuit that, like Social Security, there is no FDIC "fund." FDIC insurance, like social security, is just another government-coerced Ponzi scheme – a tax that, according to former FDIC commissioner Bill Isaac, goes immediately to the Treasury to buy "spending . . . on missiles, school lunches, water projects, and the like." Rather than increasing their taxes and punishing their relatively good behavior, these small banks suggest that the FDIC look first to Bailout Banks, the Wall Street mega-banks that have received nearly a trillion dollars in unearned, government-supplied capital via the printing press, for any increased insurance premium/tax.
Ms. Bair rejected these pleas by claiming that FDIC law does not allow her to "discriminate" against banks based on their size.
Clever.
What is really going is that the Bailout Banks are using the government and its insurance monopoly to help them gain market share by drastically increasing the operating costs of their smaller, better-run and scrappy competitors. You see, in the fall of 2008 as the Wachovias and Washington Mutuals of the banking world were going down and being served, on a federal silver platter, to the Bailout Banks, the free market – individual depositors – were silently and electronically withdrawing their deposits from poorly run and insolvent banks and depositing those funds with smaller, well-run banks. There are many local and regional banks that are flush with a solid deposit base and are willing to continue making loans as they always have, based on the five C’s of credit. Furthermore, since that fateful fortnight in October of 2008 when Congress passed and implemented the financial bailout bill and the feds began stuffing the pockets of all their Wall Street friends with newly printed dollars so that they would have money to cover two decades of bad bets, the capital markets have taken notice. The Bailout Banks have lost between 65 and 95 percent of their value since October of 2008. Knowing that the Bailout Banks have elected to spend the night with the Devil, the market knows that their reputation will be gone in the morning. For this reason, smart investors are taking their capital and running away from the Bailout Banks.
The Federales of course will not allow this. They created our present fractional-reserve banking system and have the regulatory power to keep everyone in the system in their proper caste. This is why many of the Bailout Banks have not been as eager to lend as their smaller competitors. They are keeping their newly printed powder dry for the squeeze play – they intend to use their potentially limitless bailout funds to acquire the small banks that cannot handle the surcharge or new FDIC insurance "premiums." The FDIC claims to have $20 billion in its insurance fund to cover failed banks and already has a $100 billion line of credit with the Treasury. Yet it requests a loan of over 25 times the amount in its fund to cover banks that will become insolvent over the next few years. If the FDIC can simply borrow to cover this exposure, why impose a surcharge or increase premiums at all? The answer – consolidation.
This is just the start of the pressure on the smaller banks, as the banking system becomes more and more nationalized, expect to see "section 8"-like lending requirements imposed on all banks, not just the Bailout Banks. With ACORN receiving potentially billions in the latest Obama stimulus package, a federal mandate requiring banks to make bad loans to unqualified borrowers is on the horizon. Don’t be fooled. The real purpose of this do-gooder cover is to bury small banks and allow Bailout Banks to seize market share.
"the cost of servicing the loan barely covers expenses"
I can't believe I wrote that. I'm going to bed. 3.5 hrs sleep is making me stupid.
Ignore everything I posted today, please.
rapier,
Would you agree that if they did a dutch auction of all the MBSs with a due date for bids of 4/15/2009 at 9am the amount that would be raised is substaintially less than the net present value of the future stream of cashflow from those MBSs?
The Futurist called Dow 6500 back on October 12, and have a quantitative analysis supporting the call.
I only know one thing. Well make that two. A large portion of the losses will be taken soon or they won't be. To the extent they are, we are screwed. To the extent they aren't we are screwed. I don't bother my pretty little head with magical thinking.
So Banker #1 says we need to kill mark-to-market accounting and favor dreaming up the value of assets instead of empirical evidence. Banker #2 says, I just made a fat tax-deductible campaign contribution, lemme see what I can do. Magically, the government decides to condone this because it sounds like a phenomenal idea.
Wouldn't the previous violation of moral hazard make you want to learn something? The banks will manipulate book losses to gains. Only a few years ago, Enron executives went to jail for this. How is it now perfectly okay and blessed by politicians?
Ummm, hulllllllllllllllllllllllllllllo! Smartest guys in the room!
Moreover, what will happen when the assets are (any way you look at it) simply not worth what you wish upon a star. Jiminy Cricket! If the market won't buy your assets, who else will buy your assets at artifically inflated values? Mickey Mouse?
Rapier,
I can only assume, from your "magical thinking" comments that you are a hard money guy. Fine.
But, the beliefe that a yellow metal that you can't eat, can't drink, can't wear, and can't live in, is worth anything is "magical thinking." It is only worth something because you believe you will be able to trade it for the things you need. It's based on faith rather than on any practical value. It's magical thinking.
don't be surprised when banks (BoA, Citi, Wells, JPMC and most other) start posting profits in the first half of 2009.
The asset writedowns have been astronomical.
When you write down assets to 80cents/dollar the yields go up. You have banks sitting on loans and bonds yielding 8-10% and paying 2% for funds. Operating earnings (net interest margin) will be huge and the banks have so many prior period losses that they will not have to pay taxes on this operating income for a couple year
Watch and see
I got an offer in the mail from Citi a couple days ago. A $5000 credit card with 6.9% interest for the first 6 months, then 21.99% after that, unless I paid late or TOO EARLY, at which point it would then be 29.99% interest.
Let them fail.
"Your empty houses still accumulate property tax liabilities and deferred maintenance."
Maybe banks should contract with property management companies to maintain any foreclosed properties. If the banks don't pay the property managers anything, but allow them to keep any rents until the property is sold in exchange for keeping them up, then both parties should benefit.
"I'd put my money on short covering before I'd bet on a bottom."
Do you have any money?
jmo,
I don't know if rapier is one, but "hard money" advocates understand that a currency's price is determined by supply and demand, like any other commodity. The purposes of linking it to one [a commodity] is to prevent devaluation (via the printing press) and an ever-expanding federal government. There's nothing magical in this thinking; it requires no faith in any special, intrinsic value of gold.