How Low Will IT Go
 

Will the stock market be at 6,000 Friday of next week??

BMT

Well given that it's lost 1500 in the past week alone, unfortunately it would appear at least possible, only a couple more days like today and we’ll be there, considering the economic freefall that is occurring around the world I personally find it probable.

The fact that our legislators and government as a whole don't appear to have any idea what to do with this crisis besides blindly doling out billions of dollars without any discernable plan leads me to believe that this crisis is going to get much worse before it gets any better, but I'm also a pessimist.

I still don’t understand why they couldn’t just spend the time and value the mortgage backed securities so we could figure out what they’re actually worth, and then sell them as safe investments. Considering 3 month T bills yield is at .06 % right now, if the Gov could actually value the mortgages and separate the “toxic” assets from those still performing, with that 700B-1T they’ve gotten approval for, I have to imagine they could purchase the lion’s share of the assets, then turn around and offer bonds based on those mortgages that are still performing, right now if they offered a 2% return on the performing mortgages (which probably average 5-6 percent return) with the gov backing them people would flock to them as most investors right now are looking to preserve capital as opposed to looking for a significant positive return. The gov would probably make a killing (if of course they didn’t screw it up), not to mention it would free up capital for those companies that are invested, which is most of the financial sector, and maybe if the financial sector actually had the cash with a few strings attached i.e. they had to use it to loan out rather than sitting on it or buying other banks with it, maybe just maybe things would start getting a little better. I’m no expert but doing something like this would seem to be better than just handing it out willy nilly like they’ve been doing so far to toy arrow makers and such. :rolleyes: But what do I know I’m no congressional lawyer, just a lowly working stiff with a little bit of a finance education background.

If it goes below the second orange line at about 7280, there's a good chance it will go to 5500 or so. LINK

But 6000 by Friday? Hmm. I'd guess maybe sometime in December. Although the Nikkei was down 570.18, or 6.9 percent...

Take a look at Citibank: LINK. It's below $5, and the rumor is out they may eliminate the dividend. By the way, if it stays below $5 for long, pension funds may be required to get rid of it.

As if that weren't enough, Fannie and Freddie intend to suspend foreclosures through Jan. 9. LINK.

Rhetorical question: If there is lots of help for troubled mortgages and no foreclosure, why pay the mortgage? Why should anyone pay their mortgage?

Followup rhetorical question: If interest rates can be adjusted, if principle amounts are subject to reduction, if there are no foreclosures, and if the required paperwork to foreclose may be completely unavailable...what is a security based on such "debt" really worth?

Defender, my impression is that if the securities were valued as you suggest, they would be worth so little that banks and insurance companies would have negative capital, and hence would be required to go out of business. And, too, the mortgage market is large...trillions...

Support of the mortgage market could cost a trillion dollars. LINK.

Where will we get such money? Borrow it? From whom? A foreign nation might well ask whether the U.S. is actually good for such a debt. We could print it up - but what of inflation?

Also, it's my impression that many holders of such securities are foreign banks. Will U.S. taxpayers support sending huge sums to foreign nations? Even as unemployment and foreclosures increase?

At the risk of getting out of my lane, I get the impression that the market is going to have a very SF kind of year...

Nmap--

Most of your posts are over my head.
I wish that such could be said
of your informative contribution
to this thread.:(

It isn't exactly pleasant reading, is it, Sigaba?

We may be going through (ahem!) historic times. The problem I wonder about is - what happens if this continues? What happens as wealth is destroyed? How do people react?

I read somewhere that financial crises lead to hungry people. Hungry people means hungry children. And hungry children trigger riots and the fall of governments. I don't know if that's true. Even if it is true, I don't know what the critical level of discomfort is. But - I wonder.

Even if it doesn't directly affect us in the U.S., events far away across the globe can impact us here. The failed state in Somalia is in the news; I cannot help thinking of the East European nations, of Pakistan, and others.

And I wonder, too, where the numbers will go. Dow 5500? Less? And the value of the dollar - will it go down sharply, resulting in horrific inflation?

Ah, well. Some historian will write a great book some day. Maybe it will be you? :)

Point taken, the things you've mentioned shouldn't happen, that's our government feebly trying to give everyone a trophy to buy votes and look like heroes IMO, and it's one of those steps towards socialism that I am completely against. It's like saying oh you bought at the wrong time or bought a house you couldn't afford, it's ok we'll bail you out, don't worry you don't have to be bothered by that whole personal responsibility thing. That's a no go IMO.

Maybe I'm wrong but my understanding is that the subprime mortgages i.e. the "toxic" assets were only a fraction of the overall market likely less than 10%, however all the MBS were devalued on paper after fire sales due to the marked to market rule, which in turn was what caused the banks to have liquidity issues due to capital requirements. They were heavily invested in these securities, and when those securities had to be written down it caused the banks to require more cash overnight due to the accounting rules. Obviously even for those who purchased their houses at the peak of the bubble those houses/mortgages are not worth as much now as they were then, but they still have value. I haven't seen the latest numbers but a month or two ago the default rate was like 6 % overall, which I realize is a huge amount but again the overarching problem with these securities is no one really knew which packages were heavier on the toxic assets than others. Overall most people are still paying their mortgages IMO, and they will continue to do so as long as the government doesn't give them any more reasons not too.

First let me restate we should not be bailing out the market, we should be helping the market help itself not just throwing money at companies with no plan which is what it appears our elected officials are doing. But my understanding of the bailout, prior to this week is that we were going to buy these assets with the 1 Trillion our legislators voted for. Now where did we get that money, by saddling us, our children and our grandchildren with debt. By valuing the securities, and then guaranteeing them if need be (the ones that are paying) private equity would come rushing in IMO, like I said before people and companies are looking for a way to preserve capital and with the stock market melting down I think there would be a huge influx of capital from both companies and individuals.

That's a bigger question, I would say no, but there are huge implications here with foreign relations and I really can't even begin to wrap my mind around all the issues that will come up either way, the nice thing is that's way above my pay grade.

On that I will agree with you.

Don't get me wrong I don't claim to be an expert, but what they're doing clearly isn't working, and doesn't even appear to me to have any chance of working, maybe if they'd explain the theory they're going for I and many others wouldn't be so up in arms about them squandering our money, as it is it looks like they're just blindly pissing on a forest fire.

True - but determining how much value is the problem.

It isn't just the package. Packages (CMOs) are divided into portions called tranches. The tranches have different priorities for getting paid. The top tranche gets paid first, then if there is money left the next tranche is paid, and so forth. Let's use your 6% - which tranche, exactly, will get paid? Most likely the bond owners don't know. What happens if the economy gets worse, and the 6% goes to 7%. It is difficult to know what the tranches will pay. So...how to value them?

That was the plan. I'm under the impression that we didn't do that, choosing to do a bailout instead. Please don't make me swear to that.

Quite possibly. However - how much can the government guarantee before creditors question the ability of the government to fulfill the guarantees? One must ask just how much we would be guaranteeing. Right now, the default rate is 6%. Will it be that in a year? Or will it be 20%? Or 1%? I could argue for any of them.

So...if a foreign creditor started adding up our debt...and our unfunded mandates...and our guarantees...and he factored in our ongoing deficits...might that creditor, at some point, decide we had guaranteed more than we could support?

This is not meant as a criticism of your idea. It might work just as you suggest. But I do wonder what the limit on our guarantees might be.

True. And it may be even worse than you suggest - it may be that they are making it all worse.

im with you, course i would certainly take a econ class if nmap was teaching.

I am a bit hesitant to post this. On the one hand, the 21 minute video from CNBC contains some interesting perspectives - and information that may be useful in dealing with the present financial situation.

On the other hand, some of the positions and attitudes may be annoying to some. For that, I apologize in advance. Please don't shoot the messenger.

CNBC Link

So...the sub-prime mess is a disaster, right?

Have we learned anything? Apparently not. It seems the FHA will be the next meltdown.

LINK

There is a saying going around: "Inflate or die". Apparently, we had best hope for inflation.