Interesting article: Are we heading for an epic bear market?

[jficquette]

http://articles.moneycentral.msn.com/Investing/SuperModels/AreWeHeadedForAnEpicBearMarket.aspx?page=1

This article was too long to post for me to post without breaking up, plus it had the typical ads placed around it.

John

[Sandi Egan]

To paraphrase the point of the article:
“It is my professional opinion, that now it’s the time to PANIC”
© Monsters Inc.

[stockstradr]

good article. thanks for posting the link

[temeculaguy]

Thanks, now I won’t be able to sleep. When crazy people say these things I can laugh it off. Peter Schiff is pretty accurate but he acts like a nut so he doesn’t get me too worried (but i do listen). The expert being interviewed in that article has the credentials and the demeanor that I can’t place him in the nut column, so I am going with the three glasses of wine to fall asleep plan. i am totally prepared, in a better position for his prediction than anyone i know in person, but his logic and predictions scare the crap out of me because I know he’s right. I finished my second glass and it’s not helping.

[one_muggle]

I’ve heard the technical details of this article before, from a wallstreet insider I know. He didn’t go into a gloom-and-doom scenario, but our conversations were from November(2005). He did mention a couple of other items of interest.
He said that the big boys ($100M+) saw the derivative market as a place for them to trade amongst themselves, without having to deal with the riff-raff online traders and SEC disclosure rules.
They saw (or see) the fat 401k pile as a target for making money, not just through fees, but leveraging off and in some cases, siphoning off these funds–we’ve seen the first two, will the third be revealed soon?
Lastly, he said that as technically smart as the analysts are, and as savvy as the big money managers are, nobody really had a clue what was the big picture–obvious today, it seems.
BTW, this same guy was bitching about an anonymous brokerage, who was also acting as a commercial lender and ignoring the supposed firewall–basically pushing bad bonds to 401ks to fund industrial partners. About a year later they got nailed, thus prompting that great commercial with the brokers saying “Let’s put lipstick on this pig”. The house got a slap on the wrists, which was surprising to me–I guess times were good and nobody cared. With an election year and the housing bust, I think if these guys get nailed this time, they’ll be the next Enron story.

-one muggle

[jficquette]

Before I left Atlanta in mid August I was fortunate to meet a young guy in his mid 30’s who is really sharp. He has a MBA and Law degree from Harvard. After a brief stint in Law he when to Goldman Sachs and worked a structured finance desk. That is the desk that does all of these derivatives and other funny bunny deals. After he left Goldman he went to JP Morgan where he also worked a structured finance area but had people under him.

After he left JP Morgan he bought the distributorship rights to some then obscure Rum that is now very popular. He sold the rights for about $30million a few years later.

So here is a super bright guy with more accomplishments in his short life then most would ever accomplish in 10 life times and he is telling me that his buddies on the trading desks at Goldman and JPMorgan are scared to death because the structured finance products they have pushed have no bid and are estimated to be worth maybe 10-20 cents on the dollar.

We are talking trillions of dollars of these products. He told me it was going to be the biggest disaster we have ever seen. He is planning on buying up debt after it implodes for around 10 cents on the dollar. The retail public is not privy to participating in it. He is doing through his contracts on Wall Street.

Its one thing to read, and hear these things from people on TV but to here it from a guy who REALLY knows was unnerving to stay the least.

Bernanke is not stupid. He knows what he did was wrong for the long term. The only conclusion I can make is there is something big and bad out there that no one really understands and Bernanke is afraid enough of the short term to do what he did.

It’s like watching a Hurricane come in off the Gulf.

John

[lindismith]

ok, see it’s posts like these that freak me out.

Did he say WHEN the hurricane is hitting?

[jficquette]

He didn’t know. He said something would have to set it off.

John

[Arraya]

Like the housing bubble bursting….?

[lindismith]

Or the dollar dropping…?

(As an aside, my agent in Taiwan told me it’s dropping so fast that I need to re-quote everything from him every few days.)

Or how about those Saudis….?

Or maybe a run on a major bank….?

[Arraya]

Or the inevitable decline of oil production starting 2009-10, causing oil prices to spike to $200+ per bbl

[HLS]

The system has been crumbling and decaying in one way or another for a very long time, like 30+ years.

Do you think that every Worldcom/Enron/Tyco/Adelphia scam came to light ?
That every crooked “Duke Cunningham” got caught ?

The losses will be buried and traded sideways for as long as possible. They aren’t writing down securites that are worth 20c on the dollar until they absolutely have to. They will keep them on their books at cost.

As Warren Buffets wisely said, “It isn’t until the tide goes out that you see who has been swimming naked”

There will be MANY false alarms that will shake the markets a bit. A few hundred points here, a few basis points there, cut and raise, etc.

Dollar will drop, then recover a bit.
There already was a run on Countrywide Bank, but it’s FDIC insured.

The problems didn’t start this year or this week. In the big picture we are in the middle of a gigantic mess. It could continue in this limbo for 10 or 20 more years (or longer)until the tsunami hits, or it could be hours away.

The stock market is a minefield. Too many people are way too complacent about their “investment”. It’s totally built on the greater fool theory, just like housing was in 2005.

Houses take time to unravel. Stocks can unravel in hours, days, weeks, etc.
Nobody has an instruction manual on what to do in times of real crisis. Complete seat of their pants decisions (and some of those pants are gonna be stinky)

It IS going to come. It’s only a question of when. There is too much debt piled up and too many people without any integrity to care about the system. They only care about themselves and there own pile of cash. There are people making tens of millions while other people are barely getting by.

I read about a pension fund that had to have at least an 8.50% return to fund its obligations. That’s 50% higher than a riskless return, huge expectations. Just a probable example of exposure to ABS/MBS that may be worthless while they are looking for above market returns. City, county governments, Insurance companies, the fallout from this worthless debt is beyond wildest imaginations.

The trickle down will be to many “average” investors, including 401K’s and MMA at the local bank.

Be prepared. Expect what everybody else doesn’t. I’ve never wanted to be more wrong in my life.
Having a cushion of cash keeps me content.

[jficquette]

Great post!

His buddies are worried about having to mark the stuff to market. If they had to then a lot of jobs would be lost on Wall Street and of course that is all they are concerned with. The entire market cap of Goldman Sachs is around $90 billion. That’s peanuts compared to trillions of dollars in derivatives tied to the debt.

They were afraid that the debt would be downgraded so that they would have to dump it into a market where 20% is all they could get. It would set off a chain of events that no one can truly predict.

A lot as happened since early August. The main thing is the Fed started taking this stuff as collateral at face value. I think this was done to generate a commerical tranaction that would allow these firms to keep the debt on their books at face value thereby avoiding an event significant enough to bring the house down.

The problem is the downgrade threat. That will only get worst over the next few months do to the ARM resets.

A major downgrade of the debt enough to cause billions to be dumped would probably set it off.

John

[Fearful]

A major downgrade of the debt enough to cause billions to be dumped would probably set it off.

Might it not blow suddenly, that is, a rush to the exits? Like if a downgrade is seen to be looming, the holders rush to sell before the downgrade forces the situation to be made public?

[jficquette]

There is no one to buy it right now. That is why the Fed and European Banks stepped in. Banks were afraid to loan to each other because they were concerned about solvency of the other Bank. I mean they know how messed up their stuff is. The top 5 banks own 97% of this stuff in some way or the other. Either outright or have invested or sold a derivtive associated with this.

I have no idea how it all works nor when or even if anything will happen.

John

[jficquette]

You need bigger wine glasses! LOL.

John

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