Saturday, October 11, 2008

Some Scary Times Indeed


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The BPSPX is a measure of only 500 stocks, but the BPCOMPQ is a measure of the Nasdaq composite index, which is over 2000 stocks. Never have I ever seen the BPCOMPQ this low. Obviously I was wrong in my call in the previous post. I think it would have been the right call in more normal markets.
In more normal markets, VIX would never close up for 5 consecutive session after it broke above the 45-ish level
Since we are no longer in normal markets, I do have some fears about where this market is going, and where it can go. I've started reading about the causes for the Great Depression. There is no one single cause for the Great Depression, but there were quite a few contributing factors:

1. Significant number of banks failed due to excessive loan defaults.
2. Panic run on the banks.
3. Inability for businesses to obtain loans due to increasingly conservative lending practices at banks.
4. Lack of credit, which led to progressive slowdown in capital investment, factory orders, and consumer spending
5. Decline in global trade
6. Sustained decrease in business profits, which led to increased unemployment.

I do wonder what would have happened if Lehman Brothers was either bailed out, or forced into a shotgun wedding with one of the other bigger banks. I am starting to believe that if Lehman Brothers were not allowed to fail, then we would not see the magnitude of the current crisis.
I do believe that Bernanke and Paulson both see the current parallels with the conditions in 1929 that led to the Great Depression. Consequently, the Federal Reserve is doing all that it can to make sure there is credit available for businesses to do what they do to keep the economy going, and to recapitalize the banks via the $700B bailout and plan to partially nationalize the banks. So all is not lost.
But, I do wonder why Paulson & Bernanke allowed Lehman's to fail, but not AIG, WaMu, or Wachovia.


Tyro said...

Wild stuff, that's for sure.

You got any money in this market?

Phileo said...

Hi Tyro,

Nope, no skin in the game, other than a couple bank stocks in the RRSP. Though they were intended to be long term holdings, I may even get rid of them depending on how the market moves this coming week.

Tyro said...

Heh, I think I still have some Q's and SPY in my RRSP account. Thankfully the total value is under $5k so I've just neglected it. You've got to be pretty on-the-ball to be trading this market. I haven't taken a swing trade in weeks - thankfully the day-trading bot is live or I'd be bored & poor :)

How's the real job going?