More Market Panic As Stocks Fall From Peak

Elaine Meinel Supkis

The great unwinding of quite a few financial illusions continues. Today, the stock market continued to fall ever more rapidly from its peak. And we learn more details about the schemes and plots of the various hedge funds and financial wizards. The function of these funds to make markets safer and less risky have had the exact opposite effect. And of course, the world of magic is all about everything going 'widdershins.' And we see this clearly this week. Every trick is now unwinding in exactly the wrong way.

From the NY Post:

Meanwhile, Federal Reserve officials warned that the mortgage crisis could worsen and that its staff experts are patrolling for more cracks that could appear in the broader economy.

Federal Reserve Governor Randall Kroszner told a Senate banking panel that the overall economy hasn't yet been clobbered, "but we're looking very, very carefully at that."

Kroszner and Fed nominee, Elizabeth Duke, acknowledged that mortgage problems are here to stay for a while.

"Unfortunately, I do have some experience with troubled debt, and that specific issue will probably get a lot worse before it gets better," said Duke, a Virginia banker.

Soooooo....the Federal Reserve dudes used some interesting metaphors here. They sounds like their previous job was with the Minnesota Transportation Authority, inspecting cracks in bridges. When they saw cracks and rust in 1990, they decided to look at them some more. Each year, they looked more and more until the whole thing crashed with a sudden boom. The US economy isn't 'clobbered' but when this event happens, these Federal Reservists will be there to look or rather gawk. At least Elizabeth admits the housing mess will get worse. But we knew that back in 2006! The minute the Chinese began to raise the value of the yuan and raise interest rates, the housing boom ended. We can thank the Treasury for that. And the great balloon has deflated already for a year. And we can see it is just beginning.

We still see all over the place, those out of date ads about cheap loans that are no longer operational. The companies paid in advance and these will run but I bet they won't be renewed in another six months. And this is one way the collapse will affect more than overextended home owners. Many a web site will go belly-up in the next five years. Google's big ad revenues will disappear. And many systems will feel the pain including the poor investors who thought stocks would go to 36,000. After creeping up to 14,000, they are falling and today's fall took it all back to 13,000. In one month. Generally speaking, falls are always much faster and harder than rises.

This chart here shows the latest bull boom. As I thought back at the end of February, the bull run was over. But it was re-ignited with tons of banking or equity funds....all fleeing the dying real estate market bonds and shares! So we had this bifurcated market. Anything to do with real estate companies were hammered by investors fleeing them and all other things were suddenly flooded with money but NOT for investment...for TAKE OVERS! So we saw a tsunami of these desperate things. Tsunamis happen because of either earthquakes displace the ocean or land that falls into the ocean, or a volcano erupts by the ocean like Krakatoa and displaces lots of water or a hurricane shoves the ocean ashore as the eye passes over.

Note that these triggers are all very violent. The collapse of the US housing bubble is such a displacement event. The adults who are supposed to be in charge of America could clearly see the bubble growing and could see the popping of this bubble but throughout, at EVERY LEVEL they tried to pretend all was normal and swell and the 1% interest rates that created that bubble were ignored or explained away. Even today, it is super-hard for these people who are appearing in Congress to ask for permission to run our banking systems, cannot tell the truth nor explain why these things are happening. How dare our Congress put anyone who can't clearly explain what is going on, in charge?

But then, Cassandra was very much shunned. The person who should be in charge of any dangerous system should be a pessimist. Then, they can be well within the zone of danger. The bridge inspectors see the cracks but if their boss is a goofy idiot like the guys running America, they will wave away the ernest appeals to close the bridge and double the traffic crossing it. When it falls, they say, 'WHO could have EVER expected this????' They say this all the time, these blind fools. They never expect something obvious. When I was a small child, I knew to run like crazy to get away from the ocean if it suddenly withdraws! I was once in a small tsunami and a fisherman and I ran along, yelling for everyone to run. He and I grapped two small children and ran. The wave engulfed us when we reached the roadway but we both swam with it and grapped the piers footings so we wouldn't be sucked back in. My California father always warned me, 'Never turn your back on the ocean or sleep on the beach.'

And this is the way our economic system works. We don't want a bunch of beach bums goofing off, sleeping, running out to pick up pretty shells and flopping fishes, we need people who understand oceans! And the ocean of liquidity withdrew briefly at the end of February and then there was this surge of money...and then that is it! There is no other surge.

From Bloomberg:

U.S. mortgage lenders such as Wells Fargo & Co. and Wachovia Corp. are raising rates and imposing stricter standards on some of their most creditworthy borrowers as slumping demand in the mortgage bond market chokes off funding.

San Francisco-based Wells Fargo, the second-biggest U.S. home lender, curbed its funding of Alt-A loans, made to borrowers with near-prime credit ratings or prime borrowers who don't document income. Charlotte, North Carolina-based Wachovia, the fourth- largest U.S. bank, also stopped making Alt-A loans through brokers and smaller lenders and curtailed some adjustable rate mortgages, spokeswoman Christy Phillips-Brown said.

``The credit crunch is here,'' said Keith Shaughnessy, president of Foundation Mortgage Corp. in Littleton, Massachusetts.

Barn door, meet the missing horses. Naturally, they slam shut these doors right when it is most useless and most destructive. Borrowers who couldn't document their financial status were beyond risky, this is totally insane! I would suggest many of them were illegal aliens. The US is cracking down on them right now so they abandon their houses or are deported. This is why housing in heavy agriculture communities like the Central Valley of California, Phoenix, Arizona and Texas are being hammered with record foreclosures.

I just went through a pretty violent thunderstorm here with ground strikes every 10 seconds. All of the bolts missed me but I had to unplug everything and I put my computer in the middle of the house. A literal hair raising experience. Hail, too. And wind.

Back to the story here, I believe we are now finished with the funny money market is now done and there are no more 'investors' able to splurge money as if there is no tomorrow.

From the New York Times:

WARREN E. BUFFETT once said when the tide goes out, you find out who is naked. There is suddenly a lot of skin showing on Wall Street.
*snip*
Conversations with investors over the last few days suggest they are on pins and needles. Two Bear Stearns hedge funds invested in subprime blew up, a third Bear fund with very little subprime exposure had to halt redemptions and Sowood went so long almost overnight. Many stocks with significant hedge fund ownership — Sears, Wendy’s, WCI — were pummeled in July.

As usual, when I see names of companies or funds in the news, it is fun to look backwards to what happened in the recent or distant past. This time around, the Sears and Wendy's examples are fun to look into. I know that Sears foresook their history as a great mail order house and huge distributer to become a typical department store and then a banking outfit. Many houses in the distant burghs and villages of a growing America starting in 1890 and onwards, many houses were built from Sears kits that had everything from the studs and shingles to the doors and windows, toilets, stoves, kitchen sinks and rugs as well as furniture and the clothes bought by an army of increasingly wealthy farmers and the people who served the farming communities.

All lthis bounty was possible thanks to the rail road cars that shipped the wheat and beef to the Eastern cities and onwards to a very overpopulated Europe. This golden era came to a screeching halt in the mid-1920's as the European markets collapsed thanks to the ruinously expensive WWI.

To this day, we celebrate that era and the ethos of that golden age and Sears was very much a part of it, the modular houses were sanitary and well-designed so they are easily recognized to this day and many still stand because the construction standards were quite high and these houses and all the goods within, were the envy of all visitors even from the biggest empire on earth, England. While England was housing its working classes in mean, often ugly and unpleasant cheap brick housing on narrow lanes, in America we gave birth to our open property plans with these fine houses spreading everywhere with amazing speed and ease.

We are so good at this, we still can do it and this is why we had a housing boom during a period of time when we should have been re-industrializing America and building a renewable energy system. The ideal would have been for Sears to ship solar panels all over America and to help people install this on the roofs of our houses and thus, our nation would be saved from the clutches of our present predictament: running up giant trade deficits importing much of our energy and nearly all of our industrial needs.

Wendy's is a fast food outfit that was run by a very enthusiastic man who loved his burgers and who travelled all about, checking out his stores and enjoying it all with all his heart until he died and it was all taken over by regular money men who bankrupted it. I used to love Wendy's because it had healthy foods compared to say, McDonald's.

From The Street:

Wendy's Hedge Fund Diet

By Nat Worden
TheStreet.com Staff Reporter
7/29/2005 12:09 PM EDT

Shares of Wendy's (WEN:NYSE - commentary - research) jumped to an all-time high Friday after the company announced it would heed the advice of shareholder activists and consolidate its flagging business.

Under pressure from two of the fiercest hedge funds in the country, Wendy's said it will sell up to 18% of its Tim Hortons doughnut chain in an initial public offering.

It also agreed to expand its share-repurchase authorization by $1 billion and raise the annual dividend by 25% to 68 cents a share. In addition, Wendy's will sell about 7% of its company-owned stores back to franchisees and close up to 60 restaurants.

Shares took off on the news, recently rising $5.43, or 12%, to $50.70.

The heirs of the founder of Wendy's messed up everything, trusting fast talking, spiffy financiers and wizards and everything we find under rocks. There is a common thread in 'fixing' businesses: fire staff and make it shrink. Note that Toyota, for example, isn't shrinking, it is growing. Indeed, many businesses in the world are growing, not shrinking. These constantly retreating businesses are a common feature of modern American business. I view many of these 'rescuers' of business to be hardly better than vultures and carrion dogs.

The previous financial advisors had Wendy's buy up other businesses and thus, 'expand'. Then, after the economy imploded after the .com crash and 9/11, Wendy was in even greater distress. So let's see what happened next.

From Find Articles:

Wendy's blasts Trian hedge fund's 'ultimatum'

Nation's Restaurant News, Jan 9, 2006

DUBLIN, OHIO -- Wendy's International publicly parried accusations of shareholder disregard late last month, countering an investor's claim of being blown off by management with assertions that he had tried to strong-arm Wendy's executives into addressing his demands for large-scale asset spinoffs and cost cutting.

Evidently the board of Wendy's didn't like the mass layoffs and distress sales which a minority but a large holding minority financial power was demanding. Hedge funds love to play hard ball. They imagine they are usefully cruel and handing out medicine that fixes things and everyone just has to stomach it and bear it or they will 'die'. Of course, this hard-hearted attitude changes when the baleful eye of the Economic Spinx affixes itself upon themselves. Then they want kindness and mercy. One common feature I notice when these people, cornered by events, complaining about the cruelty of capitalism and competition!

From Business Week:

Attack Of The Hungry Hedge Funds

To hike stock prices, they're banding together to force changes on companies

FEBRUARY 20, 2006

In fact, the new strategies mean that such corporate battles are now year-round affairs. At any moment, an activist fund can take a position in a target company and quickly start agitating for change. The first move is often a salty open letter to management. When Icahn, who manages various Icahn Partners funds, wrote to Time Warner shareholders on Oct. 11, he let fly. "Unless this legacy of poor decision-making is fully recognized and the board is held accountable, the dismal record of mistakes and inaction will continue to the detriment of shareholders," he wrote. It was the official opening salvo in the war for the future of the company.

Boosting share prices rather than taking over underperforming companies is the name of the game, and any strategy to achieve that seems fair play. The new activists often band together and swarm all over the management. They seek new allies such as Wall Street's investment banks. Icahn, for example, signed up Lazard LLC to bolster his fight against Time Warner. And they garner support from shareholders by using savvy media campaigns and the Internet.
*snip*
Activists are also recruiting new allies on Wall Street. In June, 2005, Pershing's Ackman hired Blackstone Group LP, a mergers and acquisitions advisory firm and money manager, to write a professional "fairness opinion" on the merits of his restructuring plan for fast-food chain Wendy's International Inc. (WEN ). It was the first time activists had used such a tool. Wendy's adopted Ackman's proposal on July 29, just a few weeks after it received Blackstone's missive. The stock has since soared 28% to its current 58. "Wendy's did everything we asked," said Ackman. "I think this tactic will be used again."

A year and a half ago, the arrogance of these guys was astonishing. Note here how they boast about using many media tools to get other investors to fall for their solutions. The anxiety to fix 'errors' and 'dismal...mistakes' and even more amusing, 'inaction'...is a characteristic of these con men. Always in a hurry! They shove everyone forwards and of course, the 'forwards' is all about ruining people's lives. It is a marvel how they suddenly change to asking people to slow down and give them some breaks and let them figure out how to fix things. Since July 17th (7/17/07---an interesting harmonic number)---they have been desperate to get everyone to stop making deals and demanding their money back and the nervous banking houses are demanding loans be terminated, etc.

It is so funny to see these guys switch from aping Simon Lagree to poor Nellie unable to pay the rent.

Last Update: 11:12 AM ET Aug 2, 2007

An investment group led by billionaire Nelson Peltz said Thursday it is in talks with Wendy's International Inc. (WEN :33.46, -1.30, -3.7% ) over how to participate in the hamburger chain's sale.Investors including Triarc Cos. (TRY :14.20, -0.38, -2.6% ) , a company controlled by Peltz, earlier this week had said they might be willing to pay as much as $41 a share for Wendy's but set a 5 p.m. EDT Wednesday deadline for reaching a confidentiality agreement with the committee.

Um, the stocks fell today from $35 to $33. I guess Peltz should have no problem getting people to sell to him. If the market continues to tank, will he still be an eager suitor? I doubt this. Many 'done' deals this last four weeks have been undone with a vengence. The tide seems to have turned.

Now let us look at Sear a little.

From the Washington Post:

Sunday, March 11, 2007;

Over its 121-year history, Sears has been a watch seller, a giant mail-order business, a home builder and the nation's favorite retailer. And now, in 2007, it is becoming . . . a hedge fund?

As strange as it sounds, this transformation of Sears is now in force. Its retail sales have dropped for five straight years, and managers complain about deteriorating stores. Meanwhile, Sears is pouring its money into risky, esoteric investments to generate huge returns for shareholders.

The man orchestrating this makeover is Edward S. Lampert, 44, who by many accounts is a brilliant and controversial hedge fund trader. As chairman of Sears Holdings, which includes Kmart and Sears Canada, Lampert is a startling example of the new avant-garde of Wall Street -- alternative investors who have the power and money to acquire and radically transform large traditional businesses.

This story is from only six months ago. It was probably set together over the previous two weeks and the edginess of the sudden global stock downturn had barely been registered in people's minds. So the wizards were still great magicians. Sear's financiers and fancy executives were all chasing golden geese that would slip away from their grasping hands. All they wanted was to get rich! Forget fulfilling some useful social niche, some great task! Money is the end all and be all. It has been six months since this article and I don't notice Sears doing all that well as a functioning part of our society.

July 13, 2007, 7:00 am

Sears Roebuck’s former chairman and chief executive, Alan Lacy, has joined Oak Hill Capital Partners, a private equity firm founded by Texas billionaire Robert M. Bass.

The Chicago Tribune reported that Mr. Lacy will be a senior adviser and work closely with the firm’s consumer, retail and distribution industry group. Mr. Lacy left Sears last summer.

Mr. Bass has a controversial history. He is one of the elderitch sharks in this ocean of opportunities. Sears used to have a nice in-store credit system which we used off and on over the years. But suddenly, in the last 10 years, they became very predatory and difficult. I had to help family members terminate their credit with that outfit and needless to say, none of us ever shop at Sears for anything. Hardnosed rip-off schemes entrapping customers is no way to keep a business like Sears running for much longer. All stores should be aware of this: they must never treat customers as milk cows or fools.

From Hedge Hogging Your Way:

I recently read the book "Hedge Hogging" by Barton Biggs, who worked for AW Jones & Co back in the early 60's (otherwise known as "the first hedge fund"). He and some partners ran their own successful fund, Fairfield Partners, from 1965 to 1973. From there, he spent 30 years building Morgan Stanley's research department and investment management divisions before forming Traxis Partners with two other colleagues in 2003. Traxis now manages well over a billion dollars, and has also achieved respectable returns since inception.

Some great quotes from the book include a paraphrase of John Maynard Keynes by Biggs' father, describing market behavior: "Unfortunately the markets can remain irrational longer than you can remain solvent." No matter how great the investor, properly managing losses is always of the utmost importance for investing survival.

On page 260, he presents a very interesting view of market "bubbles". "When a bubble in nonproductive assets financed by banks bursts, the consequences invariably are deflation and depression. The tech bubble of the 1990's was in a highly productive asset, and it was financed by stocks and bonds, not the banking system, so its aftershocks may be relatively minor." To make this a bit clearer, figure that one main consequence of the tech bubble was the huge investment in Internet infrastructure which led to reasonably priced Internet access for all. During the Japanese bubble of the 80's, what productivity gains were achieved from banks financing $50 million purchases of art or land at over-inflated prices. Japan still hasn't fully recovered.

There have been many technological bubbles. The invention of all the cotton spinning, weaving and seed removal systems from 1820-1850 flooded world markets with cheap cloth goods which caused a great crash but this was a temporary event, the industiralization of the clothing trades centered in England made England a great power. The invention of steam engines, ditto. Heck, the building of canals both revolutionized trade and commerce. Each one of these created huge crashes after huge investments and building sprees. The tendency to overdo it is fundamental to capitalism. But each of these bubbles set the stage for the next surge.

The problem with the housing bubble is, it was not a stage setting event. Barely a single thing built this last 7 years is even remotely useful in the future that looms. The looming event is the global Hubbert Oil Peak. If our wild spending was focused on preparing for this, it wouldn't matter if we overshot our ability to pay. And paying off all this would have become easier and easier as the need to use imported energy could have dropped. Instead, the building spree has increased our dependence on imported energy. If energy continues to rise, this will only worsen our collective well-being.

From the Hedge Hog article:

Note 1: This is also what caused the Great Depression after the 1929 crash, as many stock purchases were bank-financed with 10% down as margin. A bust of bank-financed real-estate at overinflated prices, with as little as no money down, could potentially lead to the next depression. The government seems to be attempting to minimize such reprecussions by inflating out of the situation (printing lots of money). Each major money panic since the first one in 1792 has been primarily caused by credit restriction, or "tight money". That is why the Federal Reserve has opened the liquidity floodgates each time a panic occur s (1987, 1998 - The LTCM crisis, 2001 - WTC Bombing, etc), which fuels the next bull market in asset and security prices.

The vast expansion of the internet and other computer-tech interfaces was a great expansion. But we frittered all this away on fast cars and big houses. This was so childish. Ever since July 17th, the ruling elites in the oil importing nations have been demanding OPEC (ie, Saudi Arabia) pump more oil and drive down prices even as the US political class has been talking about nuking Mecca and assisting the Jews in Palestine in their various schemes. All American politicans on the opposition party are talking about not selling arms to Saudi Arabia while bankrolling Israel and at the same time they are howling that if Saudi Arabia doesn't give us more oil, we will...scream at them some more, of course.

How clever we are.

From Market Watch:

Bear Stearns said on Friday that it is preserving capital to weather the current storm in credit markets, but investors took little solace as the bank's shares continued to fall.

"We've been in a mode where the appropriate path is to preserve our capital and weather the storm," Chief Financial Officer Sam Molinaro said during a conference call with analysts. He also said that he doesn't foresee any share buyback programs.

Bear Stearns shares fell 6.3% to $108.35. In early trading, the stock was knocked almost 5% lower after Standard & Poor's cut its outlook on the bank. The shares rallied as the day progressed, but stumbled again in afternoon trading.

The broader stock market also declined after Bear's conference call. The stock has dropped more than 30% so far this year.

The arrogant fools running Bear Stearns should be shown no mercy. I would suggest they lose their jobs and be forced to sell apples on street corners. These are the guys who approach businesses during storms and then appropriate the profits for themselves in return for them finding or attracting 'leverage', ie: loans. Now they want loans! While still in control of their own fates. I hope they are brought down as a lesson to our younger generations. Bad examples who have a bad end.

From the NYT:

Sowood Capital Management Founder Jeff Larson apologized to investors during a conference call on Friday after hedge funds run by the firm lost more than half their value at the end of July.

The estimated net asset value of the funds is $1.4 billion, Larson said. That's down from a $1.5 billion estimate earlier this week and about $3 billion in assets earlier this year.

Sowood sold most of its portfolio to Citadel Investment Group, a $14 billion hedge fund firm run by Kenneth Griffin, because that was the best option. Without that deal, Sowood investors would probably have been left with a total loss, Larson said. Citadel got a "substantial discount" for taking on the positions, he noted.

This particular wizard lost half of Harvard's endowment. Not $300 million but that plus another $1.5 billion. And swiftly, too. He is returning his incentive fees. How kind of him. Not all his fees, just the money he made while destroying the fund. If he were a carpenter or bridge builder, he would retun his bonus after building something that falls and kills everyone.

The firm is putting roughly $90 million in incentive fees that it earned in 2006 back into the hedge funds, he also said. Sowood will now unwind its few remaining positions and return capital to investors as quickly as possible, Larson said.

Sowood's troubles mounted swiftly, taking the firm by surprise and confounding a hedging strategy that had generated 16% returns in the 12 months ending June 30.

Now we get to the meat of the matter: this guy was playing effing BETTING GAMES! He was hoping to predict what was going to happen next and then play the role of the clever vulture and eat off some juicy carcasses. Only it wasn't the BBB ABX funds that tanked first last month, it was the AAA ones! I saw that and marveled about it all. Why did the crummy funds float and the better ones collapse?

In the first three weeks of July, Sowood lost another 8% as senior corporate credit continued to perform worse than less sturdy credit and the stock market remained benign, he explained.
Larson didn't say why he thought markets acted in this way. However, several other hedge funds have been under pressure to raise cash in recent weeks. In weak markets, managers sometimes sell their highest-quality assets first because they can get better prices. If lots of people do that at the same time, that can knock the prices of high-quality assets more than lower-quality securities.

And there we have it: a hedge fund wizard misunderstood the thoughts of other wizards who were frantically trying to revive their magic tricks and they threw overboard the stronger funds in order to raise maximum funds, well...HAHAHA. They should have spent that money at the blackjack tables in Atlantic City. Or spent it on horse races.

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Comments

[David]

Literally screaming for a fed rate cut.

http://www.youtube.com/v/cYPtCmdFCrc

[Elaine Meinel Supkis]

WOW. Thanks, David. I have no TV so I can't watch stuff unless I am visiting someone. I will post this video and make a commentary about it all. What a baby Cramer is! What an infant.

Give the lad a lollipop.

[David]

I don't have TV either, but I download quite a few shows that have good word of mouth.

I gather that Cramer gets attention by being easily excitable, but this is over the top even for him and it illustrates perfectly the selfish immaturity there is in some circles of Manhattan.

[John]

Cramer and Lampert started the same day...at goldman Sachs.

Cramer has said this. Many times. He also told everyone Lampert would wind up being the next Buffet, right after Lampert took the helm at Sears.

It's all the same thread, running through...

[Elaine Meinel Supkis]

They all end up sleeping in the same bed. And we always get stuck with cleaning the sheets when they pee or poop in it.

David: I used your You Tube in the latest story. Thanks for sharing it with us!

[Cato]

Cramer is manipulative, but unlikely he's performing for the opposite effect this time. His histrionics are over-the-top and deliberately staged for top billing and aimed at the loyal audience he believes is largely behind him, their guru, with hatchets and pitchforks. Save our portfolios – or else! He does know there are a lot of backs against the wall and the rigged, hyper-reality of these markets can disappear very quickly. He and others like him at the hedge funds need a series of rate cuts to buy time and unload more inventory. His is the rant that will go down in history as the wise words uttered, but never heeded. He got to call the top. What a melodramatic opportunist. Still waiting for the fat lady? She just sang.

Remember Herbert Hoover’s famous expression after the 1929 crash declaring the nation’s economy to be fundamentally sound? I believe Hoover was generally correct given the economy back then really did still serve the real, basic needs at the core of it. Look what happened anyway. Today, financial products are for the most part a fraud and so much of the rest of what we consume are trivial, non-essentials. The death of novelty is as much a symptom of what’s happening as the failure of markets.