What is the market waiting for?

With the prospect of more rate cuts on the horizon (realistically only 4 left before 0%), the market continued to seesaw, finally going red in the final hour of trading. However, the drop wasn't very significant. Such daily volatility resulting in so little real movement causes me to believe that we have a ways to go before we're out of this recession.

What I'm looking for is a good 700-800 point one-day drop, where from start to finish, the market was consistently in the red. This will be such a huge signal to everyone, that rich, nearly all cash position investors, will be forced to quickly and greedily invest.

Last week

Economic fundamentals last week were being watched on the stock market for the first time in a long time. It has been a while since people considered earnings in watching the stock market, and I really think it's the beginning of the end of outright market pessimism.

Come on stock market, I'd like to see my 401(k) not end the year down 40%...

Ugly Week for the Dow

What an ugly week for the Dow! -1875 pts representing -18.15%...

Spent the week at work analyzing companies, not dictated by my boss, but rather through minute to minute updates on MarketWatch and CNBC. Things were just happening so fast. There were some moments that on my 30 second walk to my boss' office, the news I was going to tell him had been changed and he about to come to tell me.

Just crazy.

But what now? With the bailout passed, money flooding the markets out of the coffers of many governments' central banks, and oil futures falling, global stock markets continue their death march. Every day they open is another 5% decrease in value. How sustainable is this?

Well, there is one number that they could end up at: 0.

Hopefully, this weekend's emergency meetings between finance ministers will result in a positive AND cohesive message. This was attempted this Friday and ended in a dismal message: "We know we need to do something, but we can't agree on what."

The way I see it now, the markets are falling due to mass chaos and fear. Perhaps the best way to calm these fears would be to shut down stock markets for a few days and allow companies to start worrying about running their business, rather than having their CEOs mesmerized at their desks, tapping at the ticker symbol as it scrolls by.

I reiterate, this is not a bailout...

I said this to a friend today, and I repeat myself here: Today, I felt like the man holding the "World is Ending" sign while the world ended around me, feeling vindicated but just as dead as everyone else.

Today's massive stock market sell off is the reason we need the liquidity injection: there is no other sane solution.

Complain all you will about "your money" or "tax payer" money, but when 50% of the population is invested in one way or another, when the market tanks 10%, you will definitely be hit.

And think, that was just one day without a bailout plan. Imagine days upon days.

The longer we go without a bailout, the longer the recession will be and the costlier the bailout will be.

Remember, when Wall Street fails, the first to get fired is Main Street. Don't believe me? Consider all the ibankers that were kept by Barclays. Now point out to me the Lehman Brothers janitor that kept his job?

Inject liquidity now or risk full economic collapse. To all the "Capitalism" screamers, remember what pure capitalism requires: a stable economic environment.

And to all of you screaming "The public doesn't want it", I have two things to say:

1) As I said already, Main Street and Wall Street are the same street, only that Main Street people have significantly less money. If Wall Street gets hit, Main Street gets fired first

2) Financial policy should never be left in the hands of people who don't know economics or finance. Just like you leave surgery to doctors, you should leave financial policy to financial professionals.

Understanding the $700B "Bailout"

Thanks to Les for bringing this subject up...

I have been thinking about this for a few days, but since I'm surrounded by finance people, there has been very little debate, since we all pretty much agree on its necessity. However, after reading what's out there in the mass media and debating with non-finance people, I have realized there is a significant gap in understanding.

First out, the $700B is not:

1) A blank check
2) An one-time authorization
3) A bailout

The $700B being proposed has a specific purpose: it is designed to add "liquidity". It will add money into markets that are currently skittish. Primarily, it will focus on the distressed mortgage-backed securities. The principle reason for many write-downs and the failure of multiple financial institutions is because there is little to no money currently wishing to buy them. When a market has all sellers and no buyers, its no market at all. When there is no market, there is no price, and assets without price immediately have no paper value.

The amount of the "bailout" is a subject of debate, but a rather moot one, since the plans call for up to $700B in securities to be sitting on the government's balance sheet at any time. These securities can be bought and sold constantly, as long as the total is never over $700B.

Finally, the notion of bailout provides the idea that the government is lending help to "Wall Street fat cats" who couldn't properly manage risk. It is not a bailout. The government is merely providing liquidity at a time when assets are severely distressed. The term distressed means the asset is very cheaply priced, perhaps below intrinsic value. Since the government has the ability to borrow large amounts of money and is very patient, allowing the government to buy cheap assets and hold over the long term not only provides liquidity, but it will make money in the long run as the market for these securities come back.

This situation has happened once before. I link to the Wiki entry here.

Currently, most of the sane Senators have also realized the need for this "bailout". The real discussion is over minor, what I refer to as punitive, details, such as CEO compensation, mortgage foreclosure help, and the use of equity warrants whenever the government helps with a distressed asset.

Hopefully, these issues will get hashed out soon, since the financial stability of the US depends heavily on a stabilized market for these assets.