Students have surely noted my fascination with markets, and markets are the reflection of the psychology of the population. The stock market picks up on the longer term feelings in monthly and weekly charts, or even the moment to moment feelings in charts from one to sixty minutes. Real estate holders can kid themselves, this past weekend I saw  some houses that have been on the market for months and months with only a high ask price, no bids.l The owners are kidding themselves, this would not be the case in a continuous bid and ask market like the stock market. This is  why sooner rather than later all these new unsold homes will no doubt go up for a literal auction, the banks will demand payment as the regulators pressure them to get old loans current.

Perhaps you have seen the video  of a large school of fish, encountering a possible danger, a shark for example, the entire school will appear to turn on a dime and go the other way. Did the school of fish all turn at once, or did they follow the lead fish?  Believe me, it makes a big difference!

Right now the school of stock market fish sense danger. They have sent prices down to levels that would haver been incredibly attractive just a few months ago, many fine companies now pay dividends of 7-9%, others routinely are paying better than bank interest at say 4%. Yet the psychology of the school of fish has radically changed. The buyers at Dow 14,000 just months ago, now recoil in horror at the chance to buy what they own at a 30% discount or more.  Have the fundamentals changes that much?

The psychology of the stock and other investing markets swings from greed to hope to fear, reflecting the socionomic POV I have explained. At Dow 14,000 investors were greedy, like the guys running Lehman. At Dow 12,000 they had hope, that prices would come back. At Dow 10,850  just above the 50% level of the entire move from the post 9/11 low, they are gripped with fear, fear that we fall over that abyss in the movie The Deep, falling helplessly into a dark unknown black hole. Let a solution appear, and greed returns running prices back up. Fear grows on uncertainty, markets abhor uncertainty. Prices went nowhere Wednesday, why, no one is buying or selling, no one knows what will happen. Uncertainty reigns,Congress has managed to stop trading in stocks, real estate, cars, and even at the retail level, check out the chart of Home Depot, Target or any other publicly traded retailer. Way to go guys and gals, no leadership there, no wonder public confidence is at an all time low for Congress.

Now, who Willl be the lead fish?  The accounting  textbooks routinely tell us that accounting pronouncements are political, everyone wants some outcome and lobbies for it. Today we Will see who assumes the mantle of the lead fish. Obama, McCain and Bush are to meet. Obama has said he is going back on the campaign trail, McCain says he is going back to work. Bush Willl be gone in four months no matter what. This will probably be the most important four or five days in the campaign, who will emerge as the lead fish to bring the school of fish, the stock market, out of danger?

As I write calmer voices like Dave Ramsey are suggesting that there are alternatives to a $700 B bailout, particularly with the same clowns in charge that got us in this mess. The more a plan can be crafted away from this knee jerk reaction, the better. Americans are recoiling horror at the idea all these mistakes would be rescued. Ramsey mentions that auctions, changing tax provisions, changing mark to market rules, could all be used as an alternative to a big bond issuing bailout, let's hope such sanguine thinking prevails.

Stay tuned.

e is this laboratory more on display than in the stock market. The stock market, unlike real estate for example. continually displays bid and ask prices, for everything. So it picks up on the longer term feelings in monthly and weekly charts, or even the moment to moment feelings in charts from one to sixty minutes. Real estate holders can kid themselves, this past weekend I saw  some houses that have been on the market for months and months with only a high ask price, no bids.l The owners are kidding themselves, this would not be the case in a continuous bid and ask market like the stock market. This is  why sooner rather than later all these new unsold homes will no doubt go up for a literal auction, the banks will demand payment as the regulators pressure them to get old loans current.

Perhaps you have seen the video  of a large school of fish, encountering a possible danger, a shark for example, the entire school will appear to turn on a dime and go the other way. Did the school of fish all turn at once, or did they follow the lead fish?  Believe me, it makes a big difference!

Right now the school of stock market fish sense danger. They have sent prices down to levels that would haver been incredibly attractive just a few months ago, many fine companies now pay dividends of 7-9%, others routinely are paying better than bank interest at say 4%. Yet the psychology of the school of fish has radically changed. The buyers at Dow 14,000 just months ago, now recoil in horror at the chance to buy what they own at a 30% discount or more.  Have the fundamentals changes that much?

The psychology of the stock and other investing markets swings from greed to hope to fear, reflecting the socionomic POV I have explained. At Dow 14,000 investors were greedy, like the guys running Lehman. At Dow 12,000 they had hope, that prices would come back. At Dow 10,850  just above the 50% level of the entire move from the post 9/11 low, they are gripped with fear, fear that we fall over that abyss in the movie The Deep, falling helplessly into a dark unknown black hole. Let a solution appear, and greed returns running prices back up. Fear grows on uncertainty, markets abhor uncertainty. Prices went nowhere Wednesday, why, no one is buying or selling, no one knows what will happen. Uncertainty reigns,Congress has managed to stop trading in stocks, real estate, cars, and even at the retail level, check out the chart of Home Depot, Target or any other publicly traded retailer. Way to go guys and gals, no leadership there, no wonder public confidence is at an all time low for Congress.

Now, who Willl be the lead fish?  The accounting  textbooks routinely tell us that accounting pronouncements are political, everyone wants some outcome and lobbies for it. Today we Will see who assumes the mantle of the lead fish. Obama, McCain and Bush are to meet. Obama has said he is going back on the campaign trail, McCain says he is going back to work. Bush Willl be gone in four months no matter what. This will probably be the most important four or five days in the campaign, who will emerge as the lead fish to bring the school of fish, the stock market, out of danger?

As I write calmer voices like Dave Ramsey are suggesting that there are alternatives to a $700 B bailout, particularly with the same clowns in charge that got us in this mess. The more a plan can be crafted away from this knee jerk reaction, the better. Americans are recoiling horror at the idea all these mistakes would be rescued. Ramsey mentions that auctions, changing tax provisions, changing mark to market rules, could all be used as an alternative to a big bond issuing bailout, let's hope such sanguine thinking prevails.

Stay tuned.

The old Statler Brotehrs song, the Class of 57 opines that one class member is

selling insurance and part time real estate.

Back then real estate was a marginal occupation, it simply did not pay enough money nor was there enough property speculation to make a full time career of it. The inflation of the 1970s, the mobility of the US workforce, and finally outright property specutlation changed all that.  Incredibly realtors have decided that one needs to be a college graduate to sell a house, handily gtrandfathering everyone in that already had a license of course.

What little looking I have done in San Antonio suggests that most sellers and certainly their realtors have not been watching hte rice of home builders nor the overall stock market. Prices are unrealistically high with 25 year old homes of 2300 s f asking for over a quarter of a million dollars.

Meanwhile most other services have fallen in prices. ON interactive brokers I can buy and sell stocks for about $2  a trade. Other discounters are at $50 and below. Even doctors see lots of patients a day as their per patient charges are limited by insurance companies. But not the realtors, they still hold out for a whopping 6% commission, ofr doing really no more than e bay does for a lot less.  IN short here is the list of houses, buy one and pay me 6%. 

I suspect we are or will shortly see the end of all that. If exec compensation will be limited, so will realtors. The conomics argues against it, as follows.

Let's say I have the choice of 'buying' a $200,000 house or renting. If I buy and sell the house over the next few years the realtors take a whopping 6% x 2 x 200,000 = $24,000. NOw add to that say $5,000 in property taxes the next two years.  Now add the $1500 a year insurance plus utilities.

Gee we are spending

RE Commissions    $24,000

Prop Tax                10,000

INsurahce                3,000

Util et al                who knows

WE can easily spend $40,000 over and above the cost of the house just to live there, we have not improved the property but are being soaked by eveyrone who sees the home owner as a target from the local property taxer to the insurance companey to theutility7 company.

I would be we can rent something in the meantime for say $1,000 per month, that would equal the real estate commission.

Which would you do?

Congress is seeking to limit the exec pay of companies that are in the $700 B bailout pool. There is of course widespread support for such a measure, ie, do not reward yourself if you are being subsidized.

But what about the big bonuses that were paid to execs at failed firms?  Seems to me taht would send a much more urgent message, how about a few of those guys standing in orange overalls in front of the NYSE?

As I mentioned previously, after the rush to the Iraq War, everyone will be reluctant to put a quick OK on any proposal from this administration, Their insistence continues to show a lack of basic understanding of the psychology of what has happened already. But I am sure Hank Paulson and George Bush thnk they can pull this off without my help……IN retrospect it is a good thing Bush did change Treasury Secretarys, Paulson came in as a new guy not beholden to Bush this late in they Administration, good thing, this is a time that the Treasury Secy needs credibility.  I don't think Snow, the last Secy, could have pulled such a negotiation off.

As usual, Tom Sowell talks commons sense about the 'bailout.'  With the failures of government on

Iraq, a mismanaged war

FNM FRE BSC

Katrina

how about the poster child for govt agencies, the Post Office that just cannot seem to find a package sent two weeks ago to me from the foreign distant land of er ah Canada…

any realistic management of social security7 or meidcare, which is to say they have done nothing to put it on a sort of IRA invest your own money in your own heath care or retirement account,

Will America continue to buy the idea of govt solutions to our problems, I hope not.

Warren Buffet has bought a stake in Goldman Sachs.  I have had you read his latest 2007 letter to shareholders. IN it he stressed thathe looked for companies that paid him on his invested capital and that had a 'moat' around them, a startegic advantage that other companies could not duplicate. In my opoinion Buffet is both a fundamental and technical investor. Let's examine this purchase to see how it fits the Buffet mold.

Goldamn and Morgan are the last two independent big investment banks. Goldman got out of the sub prime business two years ago.  Both Robert Rubin and Hank Paulson, past and present Treasury Secretaries are ex Goldman partners. There is nearly always a Golaman man at the White House. As Barton Biggs at Morgan observed several years ago, no one else can do what Morgan, Goldman and Merrill could do, which WAS to raise large amounts of money for big clients. Merrill went on to demonstrate that they could do something enormously stupid like put all their investment egss in a one risky basket but that is another story.

We are studying the equity side of the balance sheet in all three classes I teach. Buffet followed his dictum to the letter. He bought the preferred, not the common stock of Goldman. It pays a whopping 10% dividend, and will have to be paid before any dividends to the common stock holders, which are mostly as in 858%, Goldman partners. IN adition the stock has a call provision so that Goldman can buy it back, but at a 10% premium over what BUffet paid, so he stands to make 10% a year on dividends and a 10% cap gain if Goldman decides they do not need his money. But who especially in these circumstances would not want it known that Warren was one of their 'partners?'

Now the really good part. Warren negotiated $5 B worth of at the money warrants or call options with a virtual at the money strike prices.  A call option give the buyer the right to purchase common stock shares at an known price, in this case $115, the shares are already up to $134 on the news that Buffet bought the preferred, such a deal for him. And he paid no premium for the warrants, apparently that ws part of the deal to get him to buy the preferred. The only gripe I hvae is that I was not invited to participate in this deal.

So how much money has Warren already potentially made on the warrants. Rounding the commonis up to $135 or $20 above his strike price. THe MSFT calculator says that is rounding $870 M profit already, and only one day is past. Not many investors could strike that kind of deal. But Warren did. And so he gets 10% interest while he waits and unlimited upside potential in the warrants in the future. No wonder people trek to Omaha to hear this guy.

Warren is a Democrat but he is also an American and an investor. I have to believe that all parties, the US Govt, Hank Paulson, Goldman, and Berkshire shareholders were thrilled at this deal at this time. In after market trading the Dow jumped over 1% on this news alone. Such strategic moves are telegraphed at such times to give all of us confidence to hold our shares in whatever.  In short if Warren is buying , why aren't the rest of us?  While Goldman Sachs may not approach us with such a deal, there are lots of stocks discounted to their price months ago which are paying dividends in excess of 6%, the tradditional benchmark of a market bottom.

George Will has his journalistic turban in a wad over the suggestion that Congress should give, loan, whatever money to GM and Ford, while being a consultant ot the Japanese Auto Manufacturers.

I began teaching in San Antonio five years ago when the now completed road to the Toyota plant was an already worn out two lane 'road to nowhere' but to   a few substandard Mobil  homes for folks who clearly were not particularly interested in anyone knowing their exact location. Drive down that road today, wow, what a difference. Marvel at the re done overpass at Zarzmora and Loop 410. Ponder the re done service roads on both sides of Loop 410.  This is no accident.

Even the Dem leaders of San Antonio gave Republican Governor Rick Perry high marks for his 'help' In getting Toyota here.  No doubt several cities vied for that 'privilege.'  As always reality has not matched the vision as the employees are employed but no product is coming off the line. Toyota made the seem mistake as GM and Ford, bet on big. Now their Tundras sit unsold on dealer lots and the billion dollar plant is an all too sudden reminder than things can change quickly.

My point is that there is no way of tallying ALL the subsidies given all the Japanese manufacturers who are now across the southern US.  Without that number is it is near impossible to put the request form GM in perspective.  GM got nothing in terms of tax breaks for its Arlington plant which does exactly the same thing as the Toyota plant in San Antonio, make big SUVS and trucks that sit unsold. Yet Toyota got all sorts of tax breaks and capital improvements such as roads for locating here. GM sits landlocked and cannot get any break for the thousands employed at its plant.

Funny George did not mention that….

The media dislikes the Administration to say the least. And so it hypes the economy as being near depression or in a recession. As usual, Tom Sowell provides some needed perspective. Many point to Europe as a model, but Europe with its 9-10% unemployment would love to have our economy.

The solution here is to have people stay in the homes they are in. If we put thousands of anything on the market at once, the price collapses. Having two politicians running for President, each of which is trying to outdo the other in his declaration that

America is in crisis

The system is broke

Americans are having a disastrously hard time

is the absence or abdication of leadership, this is not leadership. This is particularly true as Biden and McCain for example have more than 50 years combined in Washington. Palin and Obama even in their 40s have been in some office for the last ten years or so. Of the group, only Palin can at least claim to be outside Washington.

Having said that, giving Congress another take or face disaster is reminiscent of the War with Iraq, even Hillary's suggestion to do nothing for three months on boting people out of houses has some merti in that we might calm down and consider alternatives. Finally this is hardly a model for the rest of the world…..

How about some FDR, the only thing we have to fear is fear itself.  Or perhaps a Chruchill vision of our

'finest hour.'  Massive finger pointing from politicians who have suported the exapansion of FNM into loans that should not have been made is hardly our finest hour.

We are experiencing interesting times. I wqould like to initiate a discussion site on  WEB CT for each class. We will spotlight an issue each week and realte that to what we are studying. The discussion area was created for just this purpose. Your thoughts? 

In the movie Animal House, Dean Wormer finally tires of the antics of Delta House Fraternity, and announces he is putting them on double super secret probation using a little known codicil from the Faber University Handbook. 

Don't laugh, that is essentially what the Government did with Morgan and Goldman today,

Morgan and Goldman 'agreed' to come under the provisions of commercial banking laws.  Previously they had been 'investment banks.'  Let's draw a distinction.  A commercial bank is highly regulated as to lending practices, captial, and what it can or cannot do.  IT exists to take deposits and then loan them to worthwhile borrowers. An investment bank is supposed to invest money for clients and raise money for worthwhile companies or governments.  Needless to say the latter started, drinking their own whiskey putting 100% of assets into risky sub prime mortgages on the ideas that they were government guaranteed. Goldman exited that market, and Morgan pretty well had. But no doubt to escape further possible retribution as the last two big guys standing, they agreed to more oversight.

 

I suspect this is THE END of Wall Street as we knew it with multi million dollar bonuses. And it will be the end of comercial banks like CITI acting like investment banks. As Burns noted in his article I referenced a couple of posts back, it will probably also be the end of the two party system as we know it.  It is clear neither is doing you and I any good, only themselves

Change in fact comes not gradually but cataclysmically. The Kobe earthquake preceeded ten years of marekt collapse and stagnation in Japan. I once heard John Templeton say he did not think Amercans would stand for a protracted period of depression like the 1930s. We now know the time limit was more like a few months. America was born of a revolution in 1976.  Texas came the same way in 1836.  The first Republican was elected on the occasion of the Civil War. In each case the disagreement had festered for decades or in the case of America, over one hundred years. But a change happened in a short period of time.

Both cnadidates are trying to 'change' a broker system. Washington is too expensive too self sindulgent, and too filled with regulations that matter littel to the rule breakers. There is no accountability from the bureaucrats, not for 9/11 happening, no one was fired, not for FNM or FRE, not for the dot.com meltdown, not for anything,

Most real change comes from individuals.  The steam engine, the automobile, the airplane, the telephone, all individual inventions that did not come from big companies.  The Apple II was invented in a garage. I expect it will either take decades to change America. But maybe not, if these measures fail in a few years, highly possible given the money we are printing, we could see a massive collapse that would bring some dramatic changes,like Congress actually being voted completely out of office.

Had the markets melted down to say DOW 7,000 this week, that is the sort of catalyst I am suggesting would bring about real change.  7,000 was the post 9/11 low, but wihtout another attack, I doubt the US would have stood for the mere finger pointing we are getting even now. 

By the way, how long before we cast aside all pretense, and admit the public accountants are or will shortly become public employees?  IF Goldman and Morgan are regulated banks today, I suspect the PCAOB will morph into a much more intrusive force on accountants.

S I Hyakawa came to fame during the student riots of the 1960s. His fortitue in not handing the keys to the university to those that would instantly re make it resulted in his election to the US Senate. He wrote a book, now out of print with the above title. It strikes me that during this political season, that title has a lot of meaning, partucularly as we listen to politicians.

Here are a few words you might take note of.

Fiat, no not the Italian car but the idea that one can make things so simply by ordering them.  Politicians are calling for even more regulation, Washington  should shortly fall below sea level given all the regulations on the books, but people find ways to subvert them.  Accountability is what is needed.  We have a fiat money system which got us into the problem. Otherwise the government could not have printed those mortgages from thin air, no down payments, nor could it 'bail out' everyone and anyone now in trouble.

We want to help people stay in their homes. Well there is a conundrum. If the homes beloged to those people they could stay in them. The homes however belong to their creditors, that is the problem. NOw that thebuyer has realized the 'home' is worth less than he or she paid for it and there is no down payment, there is no reason to stay in the home. This brings us to the next political wish.

Yesterday Chuck Schumer D NY with a Republican seated beside him, expressed the desire to pass legislation to prefent home prices from falling further.  This is surely wishful thinking. When did anyone ever 'order' a market to behave in a specific fashion and get what they wish.   Short selling has been prohibited for ten days, we shall see what happens when the rule is lifted.  What should we do, prohibit home selling, and only allow buying?  But wait, for every buyer there is a seller, so that won't work…..what to do?

And most home owners quickly discover they are not owners but targets. Targets for the insurance industry and every govt agency seeking money.  Typically one can be taxed by

School Districts

County Government

City Government

Community College Districts

Municipal Utility Districts

Add on various airport, port, and hospital authroiies

So are you a home owner or at ATM machine for limitless govt spending?

Let the home prices stop going up and this all becomes way too obvious, for people to stay in their

'homes.' Can Chuck make home prices go up, after all this really is what it will take to convince people to both pay ever increasing property taxes and remain there not objecting to this program.

good luck Chuck…

Mel Brooks starred in a classic scene in Blazing Saddles. INterrupted by Harvey Korman during a tryst with a young lady, he declres, Gentlemen, We Have to Protect Our Phoney Baloney Jobs!  Come to thknk of it perhaps that is What Tsy Secy Paulson told Congress about the bailout….

That pretty well sums up all the good the Sarbanes Oxley Acto SARBOX did to rpevent

Bear Stearns

Lehman

Fannie Freddie

Merril, Morgan

And I have yet to hear anything about the outside auditors for all these firms, have you?  Do the external auditors have any liability? Waht about those fancy audit committees that SARBOX created at the firms?

I just wondered…

DLE

Scott Burns does a good job detailing what has happened, and what is likely to happen in the future of investing. Please click and read.

My thoughts are as follows, this is an excerpt from an e mail I sent someone else in the investment business this weekend, thought you might find it interesting.

I got in this business in Oct 1972 working for Ross Perot in the eventually iull fated DuPont Glore Forgan which became DuPont Waltson before it went broke and was sold off piecemeal office by office.That happened to lots of fimes,

Goodbody

White Weld bought by Merrill

dempsey Tegler

and lots of others merger as Reynolds and Dean Witter merged as Bache was bought by Prudential and eventually all of them became one under the Prudential banner.  Back then so few people invested, that the few firms remaining in 1982 still had credibility as no one knew anything about any of them, a survey done in 1973 revealed that all anyone knew was the name Merrill and then there were some others, period.

Now two deaces after 1982, we have 1987, 2000 dot.com  bust, enron worldcome, and now subprime. 

And in a flash, Merrill, Lehman, (gee what happened to Shearson and Loeb Rhodes?) Morgan, all gone.

Their greed and lack of the financial discipline they supposedly preached is on display for all to see.

Okay,I think this is much much more like 1972-74 than 1987 or March 2000. From 1972 to the low Dec 1974 the Dow crawled down, I can recall sitting watching the literal ticker tape, at times it would literally stop, no one traded anything. Ten million share DAYS were typical.. I quit in August 1974, the bottom hit in Dec 1974 at Dow 577. YEar later this oversight would cause me to become a self taught technical analyst. The markets then bounced between 577 and 1,000, the 1966 and 1971-72 highs untiul 1982.  Then it took off and as they say the rest is history, till now.

The bottom in Dec 1974 was anything but obvious, I never knew the insurance regulators told the ins companies to sell their equities as Burns says but finally yields attracted attention.  

The foregoing makes more sense in context if you read Burns column first. 

DLE