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Krugman and Hempton Believe Paulson is Primarily Responsible For Today


Parsad
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Krugman and "he whose name we shall not take" believe it was John Paulson getting a margin call today that created many of the ripples.  Or maybe a combo of Paulson and Berkowitz.  Thanks to Keith for sending me the link, as I would never go to Hempton's blog.  Cheers!

 

http://krugman.blogs.nytimes.com/2011/08/08/was-that-mr-margin-on-the-line/?partner=bloomberg

 

http://brontecapital.blogspot.com/2011/08/who-has-got-margin-call.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BronteCapital+%28Bronte+Capital%29

 

 

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I have not kept up with the investment industry, but man, what is Paulson smoking???

 

"Despite healthy advances from their spring 2009 lows, banks may have more room to run, particularly if Paulson is correct in the estimate he made to investors, according to The Wall Street Journal, that housing prices will rise as much as 10 percent next year."

 

He deserves the beat down on his holdings and mass redemptions coming his way. 

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I have not kept up with the investment industry, but man, what is Paulson smoking???

 

"Despite healthy advances from their spring 2009 lows, banks may have more room to run, particularly if Paulson is correct in the estimate he made to investors, according to The Wall Street Journal, that housing prices will rise as much as 10 percent next year."

 

He deserves the beat down on his holdings and mass redemptions coming his way.   

 

Always easier to criticize.

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I feel that Parsad you and some of the other fund managers are correct. This is a huge margin and redemption call. Fund Managers and Retail investors are having to sell for various reasons. I have 10% cash and wont buy until it settles down. This inmo could go on for a few days due to a feedback loop. Berkowitz will likely be selling in the morning causing pressure on AIG, BAC, and MBIA.....

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"I have 10% cash and wont buy until it settles down."

 

I agree with this (I just wish I had the 10% cash). But does anyone think that these prices are going to bounce back up right away?

I hope I am wrong, but I would be very surprised to see a rebound in prices anytime soon. These plunges tend to feed upon themselves until they exhaust the market so I would be inclined to wait for a while before I buy anything. Just because something dropped 20% in the last week or so doesn't mean that it won't drop another 10-20% over the next year/month/week. Does anyone relly think that we are at or near the bottom here and the drop is over?

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I have been buying all last week, and am still bloody from raising that 10% cash lol. My holdings have been dropping by 15% per day for 3-4 days now. They are all irrationally priced but all went up quite a bit over the year so still may fall. People inmo are selling what they can.

 

If a fund is down 20% in a week Joe and Jane are going to want out inmo.

 

I think things will rally 10% in beat up stocks on paper thin volume or there will be take over offers by strong hands (I am deep in energy, and majors / wealth funds have to be sniffing around inmo).

 

Having gone through 4 days of 15% drops I am  fine with missing out on the first 10% rally......

Im tiny should be easy to get my bid filled, I think the rally will be on paper thin volume...

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Does anyone relly think that we are at or near the bottom here and the drop is over?

 

Well another 10% drop and we are at S&P500 = 1000.

 

do you see a drop to 800 like 2008-2009. It may but i don't think we are in such a critical situation than in 2008.

 

That said I did not buy today. I'm waiting for a bottoming. 1100 may well be a bottom. The downgrade is past news now. We are not in a recession. ECB is buying bond to calm market. This could be a bottom until new economic data comes ( which will dictate the direction of the market)

 

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Man its hard watching all those gains just evaporate like that and I agree that before long we are going to see a thin bounce, but I doubt that the 'buying opportunities" are over. However I hope ericopoly is right.

 

I wonder if todays action was really because of the downgrade or simply a continuation of the concerns over the general debt problems in Europe and the US?

 

I know that the sensationalism of the news coverage certainly hasn't helped because its certainly scaring the small investors out there. I would suspect that the markets might stabalize a lot quicker if something more newsworthy comes around.

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I think its supply and demand, Fund Investors are demanding cash and safety and fund managers dont have it. Fundamentals dont matter at this point. The system will be cleansed of weak hands and margin, and from there we will begin to recover. Hayekian must love it.  I will hold my options and cash until this stops. My networth will be battered, but hopefully we have some sort of recovery / M&A cycle.

 

Think about it. Berkowitz knows this is the chance of a lifetime (ok every 3 -4 years), but his hands are tied. He will be selling because people will log into their accounts, see down 9%, and hit sell. He doesnt have the cash so, he will have to hit sell. He owns large stacks in 5 firms..... Tomorrow more may sell due to a down 5% day.....

 

Should be great for value investors and folks with cash, but I feel we are destroying a generations thoughts on investing and markets. Someone asked me 2 weeks ago where to invest money, and I asked can you wake up and deal with a 20% loss. They said no.....   Sooner or later Joe six wont invest in the markets.

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Guest Hester

I don't understand why Paulson would be responsible for the financial decline. Wouldn't he be more willing to sell his gold stake to meet redemptions? There he would be selling into strength instead of feeding a violent decline.

 

 

I admit I don't follow or know as much about Paulson, but it doesn't make sense to me. Berkowitz I can understand, and any pain he gets from redemptions he deserves, with all the hot money flowing in, and the advertising Fairholme does, it's playing with fire. I think he's right on financials, but the road to victory is looking like it's going to be extremely painful.

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Maybe a dumb question.

 

Can the U.S. Treasury buy stock market? i.e. print money + buy stock to stop the bleeding.

 

Stock market crash not great for consumer confidence to go out + buy stuff.

 

They need to inflate there way out of this problem

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I think its foolish to believe 1 man or fund is responsibly from this. The entire industry is full of hot money from Johnny come lates  who wanted to get some upside after the market doubled.

 

----

 

I dont think the Treasury would buy stocks. It would just cause a whole host of problems. Instead I think the treasury would make cash unappealing by perhaps pushing yields into negative and causing inflation, but what do I know.

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The Thursday/Friday sell off was probably insiders who got wind of the S&P downgrade before hand (Goldmanites in the Treasury tipping their old firm, Fed officials tipping their friends in expert networks, S&P employees tipping hedgies for cash, etc.)  The insiders dumped first.  Then the actually downgrade Friday night caused retail investors to pull mutual funds, money market money, etc today.  

 

While I certainly didn't predict this, it didn't surprise me.  I read an article a month or so ago that hedge fund and retail leverage were at pre-2007 highs.  I just scratched my head.  How could be have gone from a GD2 kind of market to pre-2007 leverage so quickly? It's like the punch bowl was back immediately and Uncle Ben had poured in a little more everclear from his coat pocket to get the party hopping again.

 

 

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"Sooner or later Joe six wont invest in the markets."

 

You hit the nail on the head there and that's one of the things that concerns me. If markets keep beating up the little guy and the media keep sensationalizing market losses (and rarely mention gains) than the those small investors are going to get gunshy and look for safer, more predictable investments. If they stay away from the markets it will at best delay recovery and at worst depress overall demand, ie prices, for shares.

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People are pouring money into the markets today and the past few weeks.

 

In exactly the same proportion that people are pulling money out.

 

Just different folks.  Only thing changing is the price negotiated.

 

No doubt I can troll the headlines tonight and find people saying that "investors are fleeing".  Whatever.

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Biaggio - I think that is a brilliant idea and also thought about this today as a potential mechanism for QE3.

 

Think about it, when the fed conjures money to buy bonds, the sellers receive cash and go out and buy other bonds. At these ridiculously low interest rate levels, the effect is minimal on the real economy while it helps our government continue to run large fiscal deficits that punish the investor class - the savers.

 

Now as crazy as this sounds, Imagine if Bernanke bought 1 Trillion worth of US Equities, and retired all the shares bought. In that scenario two things would be accomplished:

 

1) Investors - Savers, who had deployed after tax capital would most likely redeploy that cash into equity markets or other higher risk investment markets where they had allocated those holdings, this money would flow to the investment class.

 

2) We would all own a larger part of the US Equity markets than before, making companies more attractive on almost every metric all the while their earnings power would most probably grow due to the additional amount of money flowing in the system.

 

I know this may sound nuts, but is it really that much crazier than the FED buying Government bonds? I don't think its that radical and while I am a staunch opponent to Keynesian economic principles, this is at least a creative way of encouraging investment which fuels economic growth.

 

 

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I'd be curious to know how much the collective redemption are to date over the past week.  Sanjeev said the buybacks will begin in earnest and I agree.

 

A company buying back shares helps stem the bleeding, and they have tons of cash to throw at it and the cash continues to pour in the door.

 

Doesn't matter if your little distressed company can't buy back shares -- if MSFT buys back some shares, it gives a value manager some liquidity with which to pick up some severely pummeled stocks on the cheap.

 

The rate of cash inflow to the fund managers just needs to meet the redemption flow.  Collectively, how long will it take for the weak hands to be swamped by the cash rich corporate buyers?  Then there are reinvested dividends of course.

 

By 2013 (long before then) the supply/demand imbalance should be rectified and those calls appear attractive.

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For the record I think it's over.

 

Maybe a little more I think.  But we are getting close. 

 

I'd be curious to know how much the collective redemption are to date over the past week.  Sanjeev said the buybacks will begin in earnest and I agree.

 

A company buying back shares helps stem the bleeding, and they have tons of cash to throw at it and the cash continues to pour in the door.

 

Doesn't matter if your little distressed company can't buy back shares -- if MSFT buys back some shares, it gives a value manager some liquidity with which to pick up some severely pummeled stocks on the cheap.

 

The rate of cash inflow to the fund managers just needs to meet the redemption flow.  Collectively, how long will it take for the weak hands to be swamped by the cash rich corporate buyers?  Then there are reinvested dividends of course.

 

By 2013 (long before then) the supply/demand imbalance should be rectified and those calls appear attractive.

 

We had a couple of slides in our AGM presentation this year, and one of them pointed to margin borrowing.  It wasn't anything like before the credit crisis, but it was significantly elevated in the last year.  If you combine increased margin borrowing with very low levels of cash in investment funds, you get a quick, cutthroat type of correction at some point, where people feel they need to be liquid. 

 

So I would say the correction is probably going to be about 20% from the peak in April on the S&P500 of 1363.  At that point, the margin requirements would have decreased significantly, some liquidity would have been achieved and redemptions would have diminished a bit.  Considering the position of most financial institutions in the U.S., and corporations in general, I think some stability in market prices will appear at that point when you compare equities to every other asset class.  But this is just conjecture...psychology manifests itself in the weirdest ways when it comes to the stock market.

 

One other little comment...at some point, and I have no friggin' idea when...could be next year or two years from now, but you are going to see some people who bought gold get really, really hurt.  Cheers!

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Sanjeev, where do you get information on the degree of margin use out there?  I always thought that analyzing liquidity positions is reasonably important to understand the fragility of the system.  When someone posted that mutual funds were at 3% cash I knew that was one possible liquidity issue.  I would love to know of any other, and margin definitely looks like one..

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Sanjeev, where do you get information on the degree of margin use out there?  I always thought that analyzing liquidity positions is reasonably important to understand the fragility of the system.  When someone posted that mutual funds were at 3% cash I knew that was one possible liquidity issue.  I would love to know of any other, and margin definitely looks like one..

 

It was a Haver Analytics slide from a Gluskin-Sheff presentation.  I read all sorts of things, and it was just one slide that stood out.  Cheers!

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