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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Chispas who wrote (76418)	3/18/2008 9:12:18 AM
From: Sunny Jim	Respond to of 116555

<<Recall that in the roaring 20s, during that fantastic stock market boom, people were allowed to purchase stock on just 5% margin.>> Thanks for pointing that out. The parallel of today to 1929 is uncanny in its similarity. With the leverage of hedge funds, the rate of margin is virtually identical to what it was in 1929. The outcome this time most likely won't be identical, but it could be worse. One can always hope that Bernanke, who studied the 1929 crash and thinks he has the answer as to what would have prevented it, is in fact right. Sure wish Greenspan had studied it also, since what would have prevented it should have been done by him.

To: Chispas who wrote (76418)	3/18/2008 9:22:02 AM
From: Paul Kern	Respond to of 116555

the Glass-Steagall Act which required all common stock purchases to be backed by at least 50% margin. Glass-Steagall did much more. Primarily, it separated banking, brokerage, and investment banking. Banks could take deposits and make loans, brokers could sell securities and launch IPOs and investment banks could play with their own money any way that wanted but only with their own money and, because they were partnerships, it was the partners money.

To: Chispas who wrote (76418)	3/18/2008 11:43:43 AM
From: Chispas	Respond to of 116555

"Stampede To Deleverage Under Way" . Michael Metz, 03/17/08 The major problem now facing markets is one of deleveraging, either forced or voluntary, by overleveraged participants, including hedge funds. The sell side is obviously overcrowded, and market prices will have to descend to a level that will lure the trillions of dollars on the sidelines looking for a bottom. Traditional correlations among asset classes are no longer relevant. Some commodities have sold off sharply - reflecting speculators not wanting to be the last to panic, or by participants responding to margin calls on other asset positions. The issue is being compounded by an unwinding of the carry trade in a soaring yen. The combination of low visibility, overleveraging, the desire of financial intermediaries to reduce exposure and forced liquidation suggests volatility will remain high. Data released within the past two weeks removed any doubt the economy is in recession. The most important data related to jobs and real estate. Total employment in February declined for the second consecutive month. An industry association reported that a record high of about 7.9 percent of mortgages were past due or in foreclosure, including delinquencies on conventional prime mortgages, also at a record. Moreover, according to the Fed, the ratio of homeowners' equity to the value of their homes fell below 50 percent for the first time in history, a figure that may understate the problem in that aggregate figures include a large number of baby boomers with only nominal mortgage obligations. Nonresidential construction activity, which boomed last year with a 15.7 percent gain, the highest in over 20 years, is joining the downturn in the residential sector. Symptomatic of the basic problem of an overleveraged economy were Federal Reserve figures that showed that, in the final quarter of 2007, the net worth of American households dipped for the first time since 2002 while total U.S. debt excluding the financial sector rose an adjusted 7.7 percent - more evidence indicating debt is still rising more rapidly than collateral values. Now that complacency about the economy is evaporating, the issue becomes the severity and duration of the slowdown/recession. The view here remains that the worst of the housing situation is ahead of us, as rising unemployment now exacerbates the problem of servicing mortgages and other consumer debt burdens. Real incomes are stagnant or declining and rising living costs more than counter any pay gains. Hopes for a capital spending boom are still considered unrealistic. Fiscal stimulus remains meager. It is still believed that the recession will prove the most protracted and painful of the postwar era. Nevertheless, interesting anomalies exist. One intriguing strategy is believed to be to short the 30-year treasury bond and go long general obligation municipals. The valuation distortion is extreme. The treasuries provide a real yield of under 2 percent, reflecting a stampede into "safety" by institutional investors, while the high yield from municipals reflects a stampede to exit by participants evidently concerned about mono-line insurers and ratings. Incidentally, a competent Treasury Department must soon realize we are on the verge of an explosion in the federal deficit and the possibility (probability) that foreigners will soon tire of holding dollar-denominated debt instruments. Consequently, it should act to extend the maturity of government debt by issuing 30-year bonds. The current liquidation phase in the stock market is viewed as more a function of the general need to raise funds by overleveraged speculators, rather than a judgment on valuations by the "efficient market." The setback presents an opportunity in North American exploration and production companies, producers of metals and other raw materials, and multinationals positioned to participate in growth in the emerging and developing nations. It is still believed that the financial intermediaries and consumer discretionary sectors that traditionally lead the market during recoveries will not perform that role in this cycle and should still be underweighted. thebulletin.us