Friday, September 19, 2008

Apocalypse be Gone!

Four Horsemen of the Apocalypse
by Albrecht Dürer

The secret formula of Apocalypse be Gone (a rip off of Bug be Gone) has been perfected over the last weeks, shipped to central bankers around the world. They were instructed to spray at the same moment yesterday.

I missed some of death spiral of GS/MS yesterday as I was checking on my SIL's lab, Sadie. She has terminal cancer, and her time is quite limited. I let her out so that she can potty (she is on prednisone), and then give her some comfort. Outside of her belly being swollen, she is not in any overt pain. Though, she is clearly a little uncomfortable--like a pregnant woman is uncomfortable.

With the extraordinary worldwide response of the markets to this news, it is easy to say, why am I not exposed more, if you are neutral. If you are heavily short, you are likely pegging your sphinctometer.

I do not believe that short selling should be banned. I do believe that stock manipiulations to the upside as well as the downside should be against the law. As you know, I'm dismissive of the parade of stories---the sausage in the media casing--that lured investors into the believing that the global liquidity boom would go on forever. They were peddling those stories right at the top. I still remember a breathless Maria B talking about global liquidity boom, infrastructure boom, third world middle class boom etc....

One of the most important things that I've learned about anomalous stock behavior is to look at the short positions. Modest, even mediocre news, is sometimes met with extraordinarily positive moves in the stocks. It made me scratch my head, until I realized that short covering rallies are very powerful.

Short sellers are the first buyers. They are not 'real' buyers per se, as they are merely buying to neutralize a position. To be fair, I should say that short sellers are not really real sellers either, as they are selling something that they do not have. On the selling side, relentless short selling takes out stops of the real holders and produces a cascade effect. And if you were a long time holder of GS and had your stop taken out at $85, only to have it go up as high as $120 and then settle at 108--and the current bid as I write is $137--how would you feel?

While there will be much weeping and wailing about the intervention, I believe that intervention was needed. And the seeming euphoria that we are witnessing is a scramble to cover shorts. The market will likely go back into price discovery mode for stocks of specific companies to find out what is out of synch with the fundamentals of the economy and the the company's prospects withing those fundamentals.

I still don't see how we have created additional liquidity to flow into the economy. We are unfreezing the credit markets by assuaging fear, and we are making institutions list less in the tubulent credit waters. Our underlying problem problems of deleveraging have not gone away. But we have mitigated the number of bodies (or parts of) on the field by allowing a bit more time to sort things out.

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