Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: Freedom Fighter who wrote (904)	10/16/1998 6:55:00 PM
From: Freedom Fighter	Read Replies (1) \| Respond to of 1722

More Fleckenstein on the Interest Rate Cut and U.S. Bubble As I see it I made a mistake yesterday in the Rap. I said that the Fed cut the discount rate and they actually cut the Fed Funds rate as well. When the story first ran it only indicated the first and I failed to double-check it. So I apologize, and I hope that I didn't cause anyone any grief. The Federal Reserve now has become a cross between the Hong Kong Monetary Authority and the Ministry of Finance in Japan. We, too, now have an official price-keeping operation. It's interesting to note that from last Thursday's lows to yesterday's highs, the S&P 500 has rocketed 17 percent, the effect of this most recent manipulation. My objection to the rate cut isn't related to the action itself - the economy is weak and everybody knew that ultimately the Fed was going to act. My complaint was in the TIMING of the move and what it means. The Fed's action and its timing were for one reason only: to manipulate the daylights out of the U.S. stock market. Once you know that a market is manipulated, you lose faith in it. It is the same as not being able to trust somebody who has lied to you. The Fed has single-handedly and simultaneously increased the price of the share certificates and lowered the value of the businesses. Does anyone think the Fed manipulating the stock market will make business any better? All it does is continue the same misallocation of assets that got us into this bubble. We know that the Fed intervenes in the currency markets. We know that it intervenes in the fixed-income markets. We know that other governments intervene in the gold markets. And now we know that the Fed intervenes in the stock market. Once you begin to step in, there is no turning back - you have to keep going. So now the Fed is in the business of manipulating all markets. I don't think they are quite big enough but in time the markets might call the Fed's bluff. Why did the Fed do this? Obviously some big banks are in big trouble, whether it is Citigroup (CCI) or Bankers Trust (BT) or whoever. What's so outrageous is that Greenspan created the moral hazard that allowed the banks to get into this predicament. He did it by bailing out Mexico (really Wall Street - see "Fiasco" by Frank Partnoy, a book we have recommended before), and by bailing out banks the last time in 1990-1991. The reason they were in a jam in 1991 was because he provided too much liquidity in the late 1980s. This allowed the banks to make a lot of junk bond loans (HLT - Highly Leveraged Transaction loans) and too many uneconomical commercial real estate loans. This guy's tenure at the Fed consists of allowing the banking system to get overextended (by making stupid loans), then bailing it out and creating an ever-bigger bubble - and a greater moral hazard - each time. The Long-Term Capital bailout increased the moral hazard again. Next the Fed says it isn't going to ease, and it eases at a time that is guaranteed to produce an epic rally in the stock market (5 percent in five minutes). Ultimately we will see the dollar weaken and the gold market rally. That was in the process of happening last night, and as the dollar hit 113 to the yen the Fed was in checking foreign exchange desks. Obviously if the dollar collapsed and gold went up immediately, causing bonds to take it on the chin, then the market would be calling the Fed's bluff. So the Fed has to get in and manipulate those markets as well. The other problem that the Fed wanted to solve was credit spreads. What I mean here is, Treasuries to corporates, to junk, to emerging market debt, etc. Now it has just compounded the problems. Given how scared the Fed is, investors are not as willing now to buy those lesser-grade credits and more people want Treasuries. We are now over 20 percent higher than when Greenspan mouthed the words "irrational exuberance," which just goes to show you that he didn't really believe what he was saying. He has been advocating the deregulation of the banking system, and deregulation is exactly what has brought us to this place. Now he wants to ease and manipulate again to solve the collapse that his actions precipitated. TODAY THE FED CORRECTED "the information it released a week earlier when it reported INCORRECTLY that there had been NO borrowings by any of the major New York banks in the week ending Oct 7. The correct information said that there HAD, in fact, been borrowing by fewer than half of the six banks in the period ended Oct 7." So there you have it: The Fed is even manipulating its own data. How do we know now when they are telling the truth and when they are not? I have no idea how long it will take the financial markets to sort through this and see it for what it is. Whether the Fed can fool them for two days or six months, I don't know. We will have to be alert and look for clues, but I can say that the Fed's action will not solve the problem. There has been massive destruction of capital around the globe. These policies are just going to ruin more people's lives, as they have ruined people in emerging markets around the globe. Nice job, Al. Market Rap Basically the market traded sideways all day long, with the exception of bank stocks, which were up about 3 percent. Of course, Bankers Trust was the exception, trading down 10 percent after being up as much as 10 percent. The over-the-counter market was up slightly and the Nasdaq 100 was down a fraction as Cisco (CSCO) and Dell (DELL) kind of dogged it. The yellow dog was barking again, crossing over $300, and the XAU was up about a percent. The dollar was down about 3/4 of a percent, and it would have been down more if the government hadn't intervened. Rumor of the day This isn't a rumor, but I am classifying it as one. I am putting my own spin on the reason for yesterday's Fed move. Bankers Trust, in all likelihood, (and if not them then somebody else) had an equity derivative book that was horribly offside, in addition to facing trouble in other derivatives. So the Fed launched its assault on the stock market, jamming it higher, so that at expiration today the massive equity derivative book didn't turn out to be a big loser. Humor of the day Some of you are wondering why I have such scorn for Alan Greenspan. I have watched his actions for some time, and he has been wrong at nearly every juncture. Along those lines, I will be sharing certain tidbits from the chairman so that you can formulate your own opinion. Here goes the first one: "It is very rare that you can be as unqualifiedly bullish as you can now." -Alan Greenspan of Townsend Greenspan NY Times January 7, 1973 This was two days after the all-time stock market peak (until 1983) and the stock market collapsed by 40 percent over the next two years. We were also heading into the worst recession of the last 50 years. How much faith do you want to place in the Fed Chairman?

To: Freedom Fighter who wrote (904)	10/16/1998 7:29:00 PM
From: Freedom Fighter	Respond to of 1722

Role of Economics in Investing >>Just setting the record straight. I never make macro predictions in my "market views". I point out risks only. << I'm responding to myself here. My view on economics is contained at my WEB PAGE on the main menu under "Economics and Value Investing". Basically I believe that one need not be overly concerned about economics to get good investment results. I also point out some of the reasons why I believe short term economic results are so unpredictable. Therefore I think they are best off being just a side issue for discussion and not the basis for investment. The one thing that I do believe is important is that there are warning signs of trouble that can tip an investor off to imbalances and problems in the longer term future. Since I invest overseas on occasion, I look for these signs in a country. Those are the countries I generally site as hot spots, higher risks, places to watch for evidence, places to avoid etc... in my market views. I have no idea when or if they will bust because I do not know what all the players are going to do in the future. I am sort of estimating probabilities of trouble. One of my main focuses is to avoid risk. The U.S. has a much higher risk profile than I am generally comfortable with. Switzerland is my darling favorite. Unfortunately, stock prices are very high there also and I have cashed in all my Swiss chips! Value Investor Workshop members.aol.com