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.