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Stock Market Hates Bailout

By someone else follow someone else   2008 Oct 6, 1:08am 30,239 views   327 comments   watch   nsfw   quote   share    


Great, after the stock market spasm last Monday when it looked like the bailout would not pass, we get the same thing this Monday when it does pass.

So now we have a crashing market, and higher US debt. The bailout was very wrong, and remains very wrong.

Great quote from reader Herb:

The Titanic is sinking. Captain Bush ordered first class passengers aboard the few $700B lifeboats. He and his crews have their own lifeboat. We are all left to drown.


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288   Peter P   ignore (0)   2008 Oct 9, 3:09am     ↓ dislike (0)   quote   flag      

Large governments are harmful to the society and they too should be illegal.

289   justme   ignore (0)   2008 Oct 9, 3:29am     ↓ dislike (0)   quote   flag      


That's the thing. I'm not sure it would be illegal, and this is exactly what I was thinking about.

290   Duke   ignore (0)   2008 Oct 9, 3:54am     ↓ dislike (0)   quote   flag      

I think the claim now is this:
"No one knows who the counterparties are."
If someone knows, and they short that counterparty you have a good 'ol SEC violation. It is a meterial piece of information not publicly available. The easiest way to detect who had the insider knowledge? Look who shorts Lehman counterparties today. The forensic FBI/SEC stuff will crucify them.
Dunno, maybe Cox expired the shorts just so he can catch a bad guy and say, "See! I am doing my job! I caught a bad guy!"

291   sa   ignore (0)   2008 Oct 9, 4:07am     ↓ dislike (0)   quote   flag      


What's the new prediction for markets? some how dow 8500 feels really old.

Good call Duke!!

292   Duke   ignore (0)   2008 Oct 9, 4:37am     ↓ dislike (0)   quote   flag      

That is a very good question sa.
The Dow prides itself on being forward looking by 6 months. Given this credit crises is triggering mass-replanning in the busines sector which will show up in lower earnings going forward. . .these are the underlying fundamentals of the contraction.
In the near term we have game changers like: bank holidays, closing the excahnges (here or abroad), the capital injctions due at the end of this month, the outcome of the Lehman CDS event (and possibly others), a specualtive currency attack, the extent to which Europe can keep first Ireland, then Greece and Spain afloat.

How about this: We see DOW 7,500 by end of October. If the world doesn't do a better job of sorting the bad banks from the truly awful (you can't save them all) and if the world does not figure out how to difuse the CDS threat, we can go to Dow 4,000 by year end, this means we could get Dow 2,000 the next year. And all of this is going way faster then I thought possible.

If we DO a good job by end of october and some measure of international cooperation an thus confidence can be achieved, how about Dow 7,000 at year end?
Sadly, nations are already moving to strengthen their own currencies. The unwinding of globalization as well as the deflation of the credit bubble is making the bad scenario look more probable. . .

293   FuzzyMath   ignore (0)   2008 Oct 9, 4:46am     ↓ dislike (0)   quote   flag      

The next 3 months will tell the tale.

Will Bernake's theory on reflating the money supply work? Or were the Austrian economists right in saying there's no way you can stop it.

Also, will Bernake pick the RIGHT place to reinflate? Is it with the banks? Is it through public stimulus?

This is one hell of an experiment we're running.

294   Claire   ignore (0)   2008 Oct 9, 7:08am     ↓ dislike (0)   quote   flag      

Bap33 - yep, sorry my question was a bit cryptic. Thanks for replying. I was wondering where your location was in comparison to ours to work out if those prices you're talking about are likely to occur here for us down the line.

I was browsing some house listings in South San Jose - where I originally thought of buying when I first realized I was priced out of the area we rent in and the S San Jose houses are now priced in the $400,000 - $500,000 range down from the $700,000's.

We could afford one of these, but I'm thinking they are going to sink lower, after all, we still have all those Alt-A's out there to go. So I am hoping that after the Alt-A's even Mountain View and Los Altos will be within our reach (the good school district areas) and by then we should know whether the company my husband works for will survive.

On topic -

The only thing I like about the bailout is that it included some legislation that allows my family to dodge a bullet we didn't even realize we were in the line of fire for - ISO's - phantom profits. I think this was included as the government has realized a lot of start-ups are going to go belly-up and a lot of people would have been in a bad situation - but maybe that's just me thinking the government acted intelligently for once - nah, that's not possible for them.

$700 billion has just gone down the toilet never to been seen again I am sure.

295   EBGuy   ignore (1)   2008 Oct 9, 7:30am     ↓ dislike (0)   quote   flag      

Well, direct stock injection seems to be the buzzword of the hour. From what I can tell (third hand, from a discussion on CR using text from Roubini), TARP gives Paulson this authority via a discussion (between Reps Moran and Frank) of the bill in the House legislative record before it was voted on... All is not lost. Call your representatives: "Give me equity or give me death."

297   justme   ignore (0)   2008 Oct 9, 8:10am     ↓ dislike (0)   quote   flag      


Yes, indeed. It looks like Paulson for once is about to do it right. But of course the devil is in the details, especially as concerns price paid for preferred stock.

My mantra is still BUY senior-preferred-voting-convertible-stock ONLY.

What is funny today is that some MSM are acting all worried about using the bailout to buy preferred equity. WTH? Do they not understand that this is infinitely better than buying overpriced assets? Did they not pay attention at all during the bailout discussion?

Actually I think I know what is going on: Regular folks and the MSM have seen stocks drop very rapidly in value during the last two weeks. They think buying preferred stock in banks is similar to their own speculation in the stock market, and therefore bad. Time for another round of educating everyone. The Buffett analogy is probably the most effective method.

Hey, maybe Cox and Paulson allowed shorting again just so that we the tax-payers can get a better deal? That would be too good to be true :-).

298   justme   ignore (0)   2008 Oct 9, 8:20am     ↓ dislike (0)   quote   flag      


l searched through the senate version of the bailout bill to figure out what you meant about ISO pahnatom gains. On page 268 I found:

9 ‘‘(1) ABATEMENT.—Any underpayment of tax
10 outstanding on the date of the enactment of this
11 subsection which is attributable to the application of
12 section 56(b)(3) for any taxable year ending before
13 January 1, 2008, and any interest or penalty with
14 respect to such underpayment which is outstanding
15 on such date of enactment, is hereby abated. The
16 amount determined under subsection (b)(1) shall not
17 include any tax abated under the preceding sentence.

But does that really mean that paper gains on exercising stock options will no longer be taxable, or is it something less dramatic than that? Do you have a reference to an independent analysis?

299   OO   ignore (0)   2008 Oct 9, 8:22am     ↓ dislike (0)   quote   flag      

OK, I am going to a few open houses this weekend, I want to see who these brave souls are that haven't gotten the memo.

300   OO   ignore (0)   2008 Oct 9, 8:24am     ↓ dislike (0)   quote   flag      

Fed might as well do a 1% cut. I already said BB wasted the last 50pt cut, it was too baby step, if he wants anything that will be remotely useful, he needs to pledge to the market participants that if you do not buy stock, I guarantee that your USD on hand will become worthless.

301   Peter P   ignore (0)   2008 Oct 9, 8:47am     ↓ dislike (0)   quote   flag      

Thanks TOB!

302   Peter P   ignore (0)   2008 Oct 9, 8:52am     ↓ dislike (0)   quote   flag      

My mantra is still BUY senior-preferred-voting-convertible-stock ONLY.

What are you talking about?

What is a convertible stock? Shares that convert to toilet paper? :)

Most preferred stocks are non-voting. Convertible bonds are like debt with equity options (i.e. derivatives!).

Are you talking about convertible preferred stocks?

303   Claire   ignore (0)   2008 Oct 9, 8:52am     ↓ dislike (0)   quote   flag      



This is where I got the info about the ISO AMT tax reform, but maybe it only fixes past problems and not any incurred in the future?

305   Claire   ignore (0)   2008 Oct 9, 9:02am     ↓ dislike (0)   quote   flag      



You're right - looks like the AMT ISO fix was just upto this Jan 08, so going forward anyone who has ISO's in a company that goes bankrupt could be in for a big tax bill. Damn, just when I wanted to credit the government with being decent for once!

306   OO   ignore (0)   2008 Oct 9, 9:05am     ↓ dislike (0)   quote   flag      


it is really not the time to argue whether buying preferred or common or whatever is the best for the taxpayer, save it for another day.

If the Fed and Treasury doesn't take care of this credit market clogging problem, we will revert back to bartering within a week! There will be no gas, no food and supermarkets will be completely light out. There are already reports of grain producers not shipping at all because they cannot trust the LOC or payment guarantee of the other side. Now multiply this situation by 10x.

The government has to do something right now, something drastic, like straight printing, guaranteeing all bad loans there was, there is and there will be.

One's wealth will pretty much by measured by your ability to secure food, and your ability to defend your food source. Got guns?

307   Peter P   ignore (0)   2008 Oct 9, 9:09am     ↓ dislike (0)   quote   flag      

Should we shop for Apocalypse now?

I don't want to survive on freeze-dried food. :(

What do you guys think about frangible ammunition?

308   EBGuy   ignore (1)   2008 Oct 9, 9:16am     ↓ dislike (0)   quote   flag      

Got guns?
Ya know, I was in the middle of my own personal freak-out -- I don't need the encouragement.
The H.3 numbers should come as no surprise. This was the TAF expansion that was announced two weekends ago. Surely you don't expect banks to meet their reserve requirements with "their" actual cash in the vaults. :-)
84-Day Maturity TAF Auctions
The increase to $75 billion per auction will triple the supply of 84-day maturity credit to $225 billion from $75 billion. TAF credit at the 28-day maturity will remain at $75 billion. The total amount of TAF credit available in the 28-day and 84-day auction cycles will double to $300 billion from $150 billion.

309   Peter P   ignore (0)   2008 Oct 9, 9:16am     ↓ dislike (0)   quote   flag      

Anyway, the Fed is trying to drown us in KoolAid.

310   OO   ignore (0)   2008 Oct 9, 9:29am     ↓ dislike (0)   quote   flag      

Seeing gold rise against all the other assets gives me no joy, really no joy at all, because I know this time, if gold breaks $1K, I will be worrying about my survival.

The lifestyle that we have taken for granted will come to an end soon. Matt Simmons said before that the JIT system in the US sets up in a way that there are on average 4 days supply of food at any location. I checked with my local Lucky's and Safeway store managers, that is about right, 4-5 days supply.

311   Peter P   ignore (0)   2008 Oct 9, 9:32am     ↓ dislike (0)   quote   flag      

OO, I will start worrying when gold hits $2000. We were at $1000 just a few months ago.

We may need to buy 30 days worth of food supply.

Y2K is delayed 8 years.

312   Peter P   ignore (0)   2008 Oct 9, 9:34am     ↓ dislike (0)   quote   flag      

New thread: Survival mode.

313   justme   ignore (0)   2008 Oct 9, 9:36am     ↓ dislike (0)   quote   flag      

Peter P, you pretentious dumbass. You suck indeed, especially when you try to upstage someone and to put on the air that they do not know what they are talking about. Just this once, I will teach you.

1. SENIOR means that the owner of the security has the highest ranked claim among holders of securities of the same class.

2. PREFERRED means that the stock has higher ranked claim than the COMMON stock.

3. VOTING means that the stock comes with voting rights, similar to COMMON stock usually does. There is no law that says one cannot create a class pf preferred stock that has voting rights.

4. CONVERTIBLE means that the stock comes with the option (sometimes called a WARRANT) to be converted into COMMON stock, so that it can be registered and traded along with the existing common stock. Conversion is typically in-lieu of return of the original payment against which the stock was issued.

5. STOCK should not require any further explanation. It refers to capital stock of a corporation.

I presented a logical hyphen-separated list of the properties that I deem important in any securities that the taxpayers should be buying as part of the bailout. And you quibble.

You are simply showing your small and petty mind by quibbling about what I said. Now apologize, or STFU and stay in the naughty corner until you are permitted among civilized people again.

314   OO   ignore (0)   2008 Oct 9, 9:55am     ↓ dislike (0)   quote   flag      

Peter P,

several months ago, gold was bought on credit against the backdrop of a very weak USD.

Now it is completely diferent. People are buying gold with real money, not credit (because there is no credit for anything), and USD is in extreme scarcity.

Same number, completely different connotation.

315   Peter P   ignore (0)   2008 Oct 9, 9:58am     ↓ dislike (0)   quote   flag      

OO, then I think gold may just shoot though $1000 right to the stars.

316   Peter P   ignore (0)   2008 Oct 9, 9:59am     ↓ dislike (0)   quote   flag      

justme, but your list contains properties that are usually mutually exclusive.

317   Peter P   ignore (0)   2008 Oct 9, 10:00am     ↓ dislike (0)   quote   flag      

Why convert to COMMON if you already have voting AND preferred?

318   justme   ignore (0)   2008 Oct 9, 11:13am     ↓ dislike (0)   quote   flag      

Peter P, your ignorance shows again.

The answer is: because the preferred stock is not listed nor trading on any exchange, and has to be CONVERTED to COMMON to become a liquid financial instrument.

Now, where is the apology?

The whole point of buying CONVERTIBLE stock is of course to be able to participate in the increased (common) stock price that one hopes will result at some point after the purchase (the bailout, in our case). If the common stock never rises above the equivalent price of the preferred stock, one would not convert it.

319   Peter P   ignore (0)   2008 Oct 10, 1:15am     ↓ dislike (0)   quote   flag      

Now, why would a common voting stock rises above the preferred _voting_ stock?

Besides, bond holders generally have seniority over even preferred stock owners.

320   justme   ignore (0)   2008 Oct 10, 4:52am     ↓ dislike (0)   quote   flag      

>>Now, why would a common voting stock rises above the preferred _voting_ stock?

Because the preferred stock does not represent a claim to a percentage (share) of the assets/value of the company, rather only a fixed amount (plus any dividends that are part of the deal, of course).

Still waiting for the apology. Are you about ready now?

>>Besides, bond holders generally have seniority over even preferred stock owners.

I see no valid point in this remark.

321   Peter P   ignore (0)   2008 Oct 10, 5:29am     ↓ dislike (0)   quote   flag      


Preferred stock has a claim on liquidation proceeds of a stock corporation, equivalent to its par or liquidation value unless otherwise negotiated. This claim is senior to that of common stock, which has only a residual claim.

322   justme   ignore (0)   2008 Oct 10, 6:24am     ↓ dislike (0)   quote   flag      

Thats what I said, in not so many words. Again you have no pint.

323   justme   ignore (0)   2008 Oct 10, 6:25am     ↓ dislike (0)   quote   flag      

Maybe you have a pint, but no point.

325   justme   ignore (0)   2008 Oct 10, 6:48am     ↓ dislike (0)   quote   flag      


326   Peter P   ignore (0)   2008 Oct 10, 7:42am     ↓ dislike (0)   quote   flag      

Whatever. You said "preferred stock does not represent a claim to a percentage (share) of the assets/value of the company..."

The article said "Preferred stock has a claim on liquidation proceeds of a stock corporation, equivalent to its par or liquidation value..."

327   justme   ignore (0)   2008 Oct 10, 8:07am     ↓ dislike (0)   quote   flag      

YES, I said

“preferred stock does not represent a claim to a PERCENTAGE (share) of the assets/value of the company…” [emphasis of the word PERCENTAGE added]

Do you understand the significance of the word PERCENTAGE here? It means that for common stock, you participate in any change in the economic value of the company. For preferred stock, you do NOT. That is why conversion rights to common stock are of the essence.

Is it clear now?

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