Wednesday, October 8, 2008

The End Is Near! The Bottom Is Near!

The past two days in stock market have been interesting, revealing, and puzzling.

What happened was no panic selling. Two Friday's ago, after House rejected the Bailout Pork Package, was panic selling. Prices drop like crazy, indiscriminately across the board, then rebound. But what happened in the past two days was steady, guided, sustained downward pressure. I'm sure all chartists have noticed it. And, in the closing minutes, you could almost see two forces fighting, Monday around Dow 10,000, Tuesday around S&P500 1,000. Both times the seller side won at the finish line.

Some big money is exiting the stock market in an organized, well planned, and determined fashion. This is not panic nor desperation. I don't know who the big money is, hedge funds, mutual funds, pension funds. For some reason some people somewhere need a big pile of cash. Not immediately, but in some near future.

When they're done, we'll have a bottom. It could be tomorrow or next week. But it won't be two months away.

Last April/May, I saw the subprime blow-up coming in August, no later than Sept. This April, when the market rallied after Bear Stearns bailout, I called it a sucker's rally and said the bottom would be after Sept at the earliest. Admittedly, I didn't see the full scale of chain reaction from mortgage to CDS to monolines to ARS to CP to Libor to money market funds to bankruns to disappearance of stand-alone investment banking to worldwide seizure. My crystal ball was foggy beyond CDO.

But now, I don't see any crisis ahead of us in the foreseeable future. There may be another bank or two failing. There will be many hedge funds closing -- perhaps the peculiar pattern in the last two days was a prelude to it. There will be long-term inflation.

But all the risks I mentioned above have been priced in. We have thought of all the terrible scenarios. (Heck, even CDS on US is selling at around 40 bps -- to put it in perspective, CITIC CDS spread is around 30 bps, meaning CITIC is considered a safer credit than US sovereign debt.) We're hopeless. We're ready to take the loss and move on. This means the bottom is near. I'm not sure about the prospect of strong economic recovery or bull market. If there is a recovery ahead of us, which is questionable after inflation adjustment, most likely it'll be slow -- let's hope it won't come in the form of yet another asset/credit bubble. I'm too young for death from heart-attack.

Despite all the gloom and doom, the world is not coming to an end. Factories are still churning. Trucks are still moving. Girls are still walking around in their pretty dresses. Funny thing about financial crisis is that, when it REALLY hurts, people will wake up and fix it. And it's much easier to fix than a real crisis, e.g., mass-scale drought. Even Europeans will come together and fix it. All the cash in exile will not be parked in gold-pressed platinum bars. And let's not forget the imminent surge in capital worldwide arising from lowered capital requirements, lowered interest rates, and massive, multi-national capital injection.

Yes, there will be inflation, maybe worldwide. But this is the biggest reason for people not to sit on cash. For many people, I suspect the stock market in the next year or so is their best and last chance to beat or barely keep up with the inflation over many years.

1 comment:

luther said...

"And it's much easier to fix than a real crisis, e.g., mass-scale drought."

don't worry --
...and soon...

just a dress rehearsal for now