Friday, September 26, 2008

Another Day in History

Yesterday, on Thursday the 25th Sept, 2008, yet another big event happened which will be remembered in history. America's big bank, WaMu (Washington Mutual Inc.), collapsed by the weight of its enormous bad debt. The news is here on yahoo. They say by far its the biggest bank to fail.

WaMu was founded in 1889. It was safe in first world war (WWI). It was not in trouble in The Great Depression. It stood in WWII. It was unaffected in 70s and 80s. BUT IT COLLAPSED IN 2008 ! Doesn't this speak of something very dangerous about US economy? Ok, so the govt there has "stronger reason" to interfere (I deliberately use word "interfere" and not "intervene"). Now those who were there to save innocent taxpayers and who kept their eyes closed all the time and who kept convincing "economy is alright" ARE "compelled" to take action. The situation is so dangerous that their action can be anything. They are planning to buy the wrongdoings by Wall Street firms with taxpayers' money and they may announce they are sitting on terminals to stop markets from falling. They have already banned short selling in almost a thousand shares and they may soon announce a ban on ANY kind of selling - even by the legitimate shareholders !

This is where stock markets become dangerous and virtually untradeable. Traders are worried about what new "rules" the govt can announce for this "free market". The natural dynamics of demand and supply are no more there and volumes of trades are drying up - meaning lack of liquidity resulting in wider spreads, increased volatility and sudden reversals.

In my last post, I doubted Buffet's intelligence. Read the following paragraph which is quoted from the news story:

"The seizure by the government means shareholders' equity in WaMu was wiped out. The deal leaves private equity investors including the firm TPG Capital, which gave WaMu a cash infusion totaling $7 billion this spring, on the sidelines empty handed."

TPG Capital would have thought they made a killing when they "infused" $7 billion in WaMu. Now they must be weeping for their "intelligent decision". Buffet is too intelligent to be wrong. I hope so. But I also heard a story about Newton, the great scientist, who is said to have created two holes, one big and one small, on the cage for his two cats, one bigger and and one smaller. I don't know whether this is true or false but even if its true, does not mean Newton was not intelligent. May be after some time people talk about Buffet's story in a similar way.

Friends, I still maintain that the markets are not tradeable as long as the blatant manipulations are there. However, as my friend Jules of Jules in Jumbles fame said, intraday one can trade, but my addition to that is trade if you have good reflexes and tight stop loss.


  1. Trade FX, trade wives and husbands, trade your cats and dogs, just don't trade stocks!


    Harry, you sound so furious...don't be...pricks tend to live very long lives...forget them and enjoy yours.

    On a serious note, stock index futures are still very good to trade (I think). I'm not sure about holding them, but I know a very experienced trader who still sits on his trades (all mini futures) until the trend turns against him. He's making good profits :-) His advice is to trade a few markets: commodities, FX, indices ie. diversify. And I agree with him that by trading a wide range of instruments, you naturally become more attuned to the market, to any distress signals it sends out and opportunities it offers. I think PT is on your blogroll :-) Do go through his posts. He's an excellent swing trader. Awfully cool :-)

  2. Thanks Jules,
    Well, u r right its tradeable but not for positional.

    My point is there is a period of total uncertainty given the interference.

  3. Uncertainty breeds fear and fear is a very good play esp in intraday trades. The mad rallies when bears take cover and death plunges when bulls flee are what I live for these days :-)

    But of course I'm talking about a market that actually still wants to play amid the uncertainty.

    I agree that it's a testing time for those holding positions.

  4. It is amazing to me the brazen corruption taking place on Wall Street. I am speechless that they (Paulson and Bernake) are trying to sell this "bailout" in such a big hurry and with so much pressure. What does Paulson care anyway, he will be gone by January of next year. It is just incredible.
    Thanks for your great insights, Harry.

  5. Thanks Mish,

    If you are an American, then think this is the beginning of the end of free economy that the US had been talking about and lecturing to all the world. When very similar thing (a housing bust) happened in Japan in 1991 and they started lowering interest rates and bailing out banks, the US leaders taunted them and cried in favor of free markets. The trouble is common people in US don't understand it at all.
    God help them.


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