Bear Market? and Go Fly a Kite, Jim Cramer

First is there damage out there? Sure there is. But is it Bernake’s fault? Only if you agree that Bernake should have pulled the brakes about year or two ago! Greenspan pushed the interest rates down very hard, and it worked. Likewise Bernake should have pulled the brakes hard to send a message that people are abusing credit.

Cramer and the investment bankers are panicking because they are loosing their bonuses. The gravy train is coming to an abrupt halt and they are crying. If these investment bankers REALLY cared about the “people”, and their houses then they would give up some of their profits to help the trouble loans. Ooops, oh yeah they are not doing that because that could eat into their year end bonus.

Lowering interest rates is not going to help anything. The problem is that people bought into a craze promoted by the real estate market and everyone surrounding it. A great post is the following at rain city guide. This couple wanted to get a 15 year fixed rate mortgage and found that they could not in Seattle and complained. What did the mortgage agent say?

Christy, Seattle is not too pricey for normal people…your 15 year fixed mortgage is.

This agent recommended the following:

Same payment with each scenario…except you’re able to buy $132,725 more home using a 40 year fixed over the 15 year fixed and  $107,750 more home with the 30 year fixed mortgage.    With an interest only product, such as a 30 year fixed rate with a 10 year interest only payment, the savings (or how much more home they could buy) would be even more substantial.

This agent recommended that you go longer in debt so that you can “buy more house.” This is the heart of the problem and will not be fixed by lower interest rates. What we need is for mortgage agents like this to stop recommending, “buy more house go more in debt.”

So when people like Jim complain I say, “Jim go fly a kite!”

So are we in a bear market? I am tempted to believe no. There will be people who think now is a time to buy value, and they will start buying.

That tells me that good stocks (and sectors) are being sold off with the bad, and that has me patiently looking for values. One of the places I’m looking is sectors (and stocks) that–even with massive selling–are holding their valuations, staying off my list of fresh 65 day lows.

In the book Trading for a Living the author makes the case that there is no such as value. Price is perceived value, and is what another person is willing to pay at the moment (pg 45). He illustrates over and over again how prices will dramatically change even though the company and cash flow has not. In the 1929 crash a 100 USD stock was sold for 1 dollar because that was all somebody was willing to pay. In the 80’s United Airlines went from 300 to 100 because that was all people were willing to pay.

So this means we are in a bear market? I predicted a pullback in the beginning of the year, but it turned out to be a pothole. And then I did think that the high water mark was reached when Casey Serin stepped out. So while I can see the potholes the big drop has been elusive and it has confused me. But as per my blind spot blog entry I think the problem is that the big shoes have not hit the floor yet.

The problem we have is that the big investment companies are still too liquid still and too profitable. These little pullbacks are peanuts for them in the overall scheme of things. They are not hurting, and thus are continuing to pile on the risk. These investment houses think these pullbacks are potholes and continuing buying to “improve” their cost basis.

The problem and it was said on CNBC is that there are 750 Trillion dollars in derivative products floating around on the market. This is what will make or break the market. My thinking is that these products are only profitable if the market has direction, and that is why I am hedging that there will be no direction.

There will be too many people panicking, and too many people looking for value creating a market will go in no direction.  With a directionless market structured products will loose money because the premiums used to “neutralize” risk will eat into the leverage. It will be those premiums that will cause the markets to unravel and wipe out many accounts.

The winners? Traders…  They will love this market as it goes up and down and the traders will keep this market going up and down while others keep crying…

I am also thinking this is a Taleb Black Swan moment where trying to predict the outcome is completely hopeless.