The stock market is over.

It’s served it’s purpose, and now is, indeed, a casino. Perhaps it always has been.
So few shouldn’t be allowed to jerk so many around. Part of the problem is that technology has outgrown the market. Things happen way too fast. There needs to be some sort of “greed buffer”, a check and balance system that would slow situations like happened on Monday (9/15/08).
BTW; I suspect sculduggery.
Peace,
maneorge

The Market rallied today btw…somewhat anyway.

Instead of saying the obvious, let me ask a different question. What do you think should replace it?

How so?

What would a ‘greed buffer’ look like exactly? How would it work? How would it be better?

:dubious: What do you base that on? Where is your evidence?

-XT

It’s amazing. Millions of people have grown old and retired investing in the labor and ingenuity of US companies and their employees, but every once in a while something gets out of whack and suddenly it’s unbridled greed and evil 24/7.

It’s just like everything else. When things are going great people ride the gravy train without even thanking the people who made it happen for them, but they have no trouble pillorying them when things aren’t going so well.

mangeorge,

What do you think its purpose was?

I think somebody should ask the obvious. What exactly is the problem? Is it with public ownership of companies? If so, why?

Perhaps there are some ways that short selling or manipulation could be dealt with, or perhaps laws or regulation concerning some of the hyperspecialized financial instruments could be passed, tying them to something more ‘real,’ for example. I can see reasons to do something like that. “Get rid of the stock market,” though? I don’t see the logic, or what would be done instead.

I think the OP is obviously overstating the case, but there are a few regulations that could be put in place. One would be to raise margin requirements and requirements for shorting. If you require there to be actual money backing up transactions (rather than highly leveraged loans) you can decrease speculation somewhat. Also, beefing up the SEC enforcement arm would be useful to help weed out actual corruption, I think.

Of course, as long as the financial institutions can continue to pay off politicians at the rate they are accustomed, nothing will happen. The US taxpayer will continue to backstop the losses while Wall Street takes the gains. Nothing to see here, move on, I think American Idol is back on soon…

Short selling itself is a corrective mechanism. Lehman made stupid stupid decisions regarding credit. Some saw that, and shorted them all the way to the bottom.

Disappointed longs always blame the short sellers, as though there is some concerted conspiracy. Remember, with short selling, there’s no limit to what you can lose, but there is a limit to what you can gain. If shorts are betting on a good stock going down, they will lose their shirt when it bucks back up. Mismanaged and overvalued companies in particular mumble darkly about shorts. If they’re undervaluing your company so badly, screw them – keep buying your stock back on the “short induced” way down, then profit when your true intrinsic value inevitably shines through.

Shorting and manipulation are not the same.

I wasn’t trying to equate them. If shorting is out of control in some way that goes beyond correction and damages the broader market, new regulations might be justified. I suppose I was thinking more of pump and dump type manipulation.

First, Lehman Bros folds, and now the US Goverment is going to bail out AIG for $85 billion? Yes, billion!?!?!? What the hay? See link: http://wjz.com/national/Fed.rescue.AIG.2.819168.html

The rich have gotten soooooo fat, there’s going to be an explosion from the rich barfing all over the US middle class. They have officially killed any hope of trust in the stock market and squandered any sign of future hope of retirement for the honest and meak…the worst scandal since Enron et al, IMHO. I was reading how the big four (These two + Merrill Lynch and I forget the other pig) are ALL over-extended!

Man, Bush’s term is going to end with fireworks! Then, the whole country’s going to go down in flames! The bubble of all bubbles is about to burst, and it’s the end of the roaring '20s all over again!

Buddy, can you spare a dime?

  • Jinx

This may be the very worst argument ever presented in GD.

So, what is the stock market? The stock market provides a market for trading of company shares in a secondary market. Companies issues shares of stock which represent ownership of the company. They do this in order to raise money. The shares are worth far more in the primary market because they are liquid I’m far more willing to participate in a company’s IPO if I know I can immediately sell the shares should I need to do so.

Sure, some of the short term volatility we’ve seen is probably the result of overreaction by some investors. But, listening to nutjobs on the financial message boards whining about naked shorting isn’t a solution.

The average investor should probably consider just turning off CNBC and go for a walk.

The stock market? Originally? To raise capital that was beyond the means of the owner of the business. Secondly, to spread the risk around.
Right?

The stock market is working precisely as it supposed to. The one thing that some very smart people appear to fail to understand is that the stock market generates superior long term returns than other investments because it is risky. If we ‘fix’ it so large companies don’t fail and all investors get a smooth ride the return will diminish. This is the ‘risk premium’. The additional return an investor expects over safe investments as compensation for the risks they take. If government intervenes too much they take away the consequences of poor decision making and reduce long term returns.

For younger investors this meltdown is great. It means that future investors will demand a higher return to compensate for the risks which have recently manifeste themselves. A well diversified investor with stocks and some bonds has lost something around 10-12% at the higher end. This is hardly catastrophic. If you invested an unwise sum into a single firm then I can hardly feel sympathy. Even the most cursory observer of Enron shuold know better.

The OP lacks a really frightening and fundametal understanding of the role the market plays in capitalizing companies and allowing people to take risks without going out and starting their own company. I am happy to watch the market work exactly as intended.

I addressed most of this, except the last, in the OP.
I suspect, not accuse, shady dealings. According to the experts so do many more.

Gravy train? Nobody gives me anything. All I get is due to my compensation. The entities you mention are in it for themselves. Nothing wrong with that, but they’re using my resources. If I was costing them, they’d get rid of me.
I should thank them? :confused:

What do they owe you? You made what was presumably an educated guess and risked your money, and now you’re blaming them because it didn’t pay off for you. If I bet on a company and it fails, the responsibility lies with me. There is no “just compensation”, I am not “owed”, the market knows no justice. What it does know is what businesses will and will not fail, and those businesses get exposed eventually. Right now is one of those times. The market is shaking out, and what remains afterwards will be stronger for it.

You bet wrong. Sorry about your luck. I trust you did your homework and anticipated this years ago when the companies were giving you crazy returns, right? You were invested in gold and oil and other commodities, right? Oh, but those people are greedy, too. Boy, they get you coming and going, don’t they?

Read the first part of your first sentence here. :stuck_out_tongue:
You’re partly right, though. I do lack a fundamental understanding of economics. As evidenced in this thread.
I also lack an understanding of how my car works, but I suspect something’s broken if it isn’t running up to par.

Not really…you made some fairly vague statements but didn’t really go into any detail. I’m asking you to expand on your points.

No? Look around. See all those roads? See all those stores? See all that food? Notice all those cars? Do you have any of those things? If so…where do you think they came from? They came because our country is wealthy and prosperous. They aren’t gifts of the gods.

So, after a century (or more) of prosperity basically built on the market you want to toss it out now that there has been a down turn. I’m trying to understand your logic on this. After all, it’s capitalism that built all that good stuff.

If you were in Africa, do you think you’d get the same ‘compensation’? How about in some South American hell hole? What if you were born in Mexico without a silver spoon in your mouth? Why is it your ‘due’ exactly?

Who is ‘they’ and what ‘resources’ of yours are they using exactly? Do you realize what BUILT our society? Do you figure it’s the little guy who built it in spite of the rich fat cats?

Well, to be sure. But…the taxes they pay would probably provide you with a nice little safety net to save you from starving, so, it’s not a total wash. And…since presumably you have some worthwhile skills ‘they’ wouldn’t be losing money on you…thus giving you employment, ehe?

Well, you probably should, but I doubt you will. For that matter, are ‘they’ ASKING for your thanks…or for your labor? My guess is ‘they’ are more concerned with your ability to be worthwhile than your thanks.

-XT

Me???
Where did I give the idea that I lost anyrhing? Didn’t mean to. I’ll likely come out way ahead on this mess.
My company does indeed owe me my compensation though, including bennies. My pay is always well behind my work. I let them get away with it because I realize the difficulty in paying in advance.
No, I’m feeling kinda sorry for those who did lose, and won’t get it back. Especially the workers.

But you wouldn’t argue that the automobile be abolished because you’re having problems with your car.

Generalizations like the one in the OP are almost to vague and ignorant to respond to meaningfully.

In short, the stock market is almost assuredly “not over.” These kind of events are par for the course on a historic basis. They’ve happened before and they’ll happen again. The basic ingredients are greed, stupidity (in the form of short-term thinking and foolish extrapolation,) and inefficiency.

What happens is an inefficiency is found, widened, exploited, and tons of money gets pumped into with tightening margins. Those margins are exceeded and the thing collapses taking a bunch of people with it. After it collapses a bunch of rules are put into place to stop that inefficiency from being exploited again, which is kind of besides the point since it’s no longer a danger. Everybody has moved on to the next one and the boom/bust cycle goes on. One of the main problems, and why this keeps recurring is that nobody has generated a reasonable mathematical expression of risk that can be used. Instead they use a substitute, something that is almost like risk, or looks a lot risk. This is called “beta” and it’s a measure of historic volatility.

The problem with Beta is this. If a giant boulder were perched precariously over a path, and it had sat there for a million years being eroded by wind and rain so that it was teetering, than according to the concept of beta it would be safe to walk under that rock. After the rock falls, according to beta it’s very dangerous. This sounds counterintuitive and stupid, and it is. The problem though is that beta often works very well for long periods of times. It’s a good indicator for small repeating risks. It’s a bad indicator for large nonrepeating events.

These kind of events are systemic to the market. Some even view them as a kind of monetary ethnic cleansing, stress to strengthen the strain.

One issue that the OP seems to not notice is that the current correction actually has very little to do with the stock market. It’s merely being reflected in the stock market.

Given the larger general pattern, let’s take a look at what actually happened this time around, and then we’ll see if we can’t draw some inferences about what the future holds.


If we’re looking to place blame, a good place to start is with me and the rating companies, Moodys and S & P.

Many years back, in the 1980s some folks at Salomon Bros. started work on a holy grail type problem. If you could solve this one, than untold riches would be yours. This problem is like antigravity in it’s complexity, lure, and potential.

The problem is this: Mortgages are a lot like bonds in reverse. Bonds can be very attractive investments since they provide permanence and definition and there true risk is theoretically assessable, or at least it seems simpler to assess than many other vehicles. The more you can make a mortgage look like a bond and act like a bond, the more saleable it is.

The problem with doing this is that people will move, refinance, or payoff mortgages whenever they feel like it. Let’s say you have a billion dollars worth of 30 year mortgages guarranteed by the Government through GNMA or somesuch, and they are all paying 7%.

If you could sell these to somebody than the company that originated the mortgages would have another billion dollars that they could use to originate more mortgages, and do more business, and somebody else could have a nice safe instrument paying 7% and you would get a nice big commission. A lot of people would have new houses due to the freeing up of capital. Everybody would be happy, and you would get rich while making the world a better place.

If you try to do this, you have a major problem. If interest rates go down so that mortgage rates are 5% in the next two years than everybody with those thirty year mortgages is going to refinance. The guy that thought he was going to get 7% for thirty years, now has all his money back, no more interest, and needs to reinvest at lower rates . He’s pissed.

At Salomon Bros, they invented something called a CMO or Collateralized Mortgage Obligation. What this did was divide a pool of mortgages into tranches.

Again, start with a billion dollar pool of 7% mortgages backed by the Gov. Deciding on what you think will happen with interest rates over the next several years, divide this pool into groups. The first group will get their money back first, the second second, and so on and so on. You know that historically 10% of people refinance in a year no matter what. These assumptions are collectively known as PSA assumptions. Set them accurately and the A tranche might look an awful lot like a 5 year bond, the B tranche, like a 10 year bond, and so on and so on.

These PSA assumptions historically weren’t very good, but everybody knew it, so it wasn’t such a big problem. You could make them more accurate by fiddling with the interest rates of the various tranches. You might make the earlier tranches pay less than 7% and have a more defined maturity, and make the other tranches pay more and have a less defined maturity by assuming the early payoff risk.

This also didn’t work very well, but it was a step towards making mortgages look more like bonds. Around 1990-91 I was a trader on Wall Steet with trading CMOs, and one of many bitching about their lack of bondliness (that’s the part where it’s partly my fault.) We bitched at length and to the right people, and they listened to us, and asked us a lot of questions. The end result was that the VADiM tranche of CMOs was essentially perfected. Very Accurately Determined Maturity tranches had existed before, but none of them had really worked. This one worked. It was for all intents and purposes exactly like a bond. Because it was made up of Gov insured mortgages the ratings company pronounced it triple A as they did all other such instruments.

Much money was made. I quit two years later, burned out, and moved to the country, but the party continued in my absence.

The unholy offspring of the VADiM tranche was the Z tranche. This was the tranche that did absolutely nothing but absorb the risk of all the other tranches to make them act more like bonds. The Z tranche was incredibly volatile and acted like nothing else that had ever existed. It was pure risk, and I mean that in the sense of that mathematically undefinable risk that almost by definition is unknowable. Moodys and S&P also rated this insane instrument AAA.

It was very very sexy.

(part II) coming up.