Hope springs eternal- beware of insanity part 2

This morning markets around the world are roaring their hope-filled applause at the announcement that the US Government is trying to set up a place to swap in bad debts and get them off of bank balance sheets. If they can figure out a structure this weekend, and get it approved by Congress this could be the next necessary step to healing the credit crisis.
The other intervention announced yesterday is the farcical ban on short selling for the next 10 days. This is a ridiculous attempt to stop the natural correcting mechanisms of over-valued stock markets. Also see Big Picture article: SEC induced mother-of-all short covering rallies.
Notice there was no intervention to stop insane speculating on the up side over the past couple of years. Had there been some regulation on the upside we no doubt would not have arrived at the crisis now plaguing the world. But now that markets are trying to come back down to reasonable valuations, the authorities are stepping in to stop the evil speculators. This is a stop gap that will artificially inflate markets again temporarily only to exacerbate their declines again down the road.
China too is following western governments, desperately trying to stem broadening social unrest flowing from the 70% plunge in its stock market over the past year as little investors have been literally wiped out. But in typical fashion their government did nothing to stop the gambling and speculation that drove markets to bubble peaks. Now they are trying to force domestic funds to buy up Chinese shares. This too shall fail. So much for decoupling: Beware falling BRICS.
The first step to rehabilitation is to admit addiction and let the addicts experience bottom. Government must stop trying to prop up and enable crazy valuations that still persist.
Quick fix, artificial intervention in stock markets, will not solve the global economic slowdown. It will not undo the evaporation of real estate wealth that has slammed the western consumer this past couple of years. And notwithstanding a big bounce today, it will not recover loses that most investors have suffered week to date, or month to date and certainly not year to date.
Remember losses of 30%, require gains of 43% to recover, loses of 70% require gains of over 230% just to recover. When markets do finally make their bottom, and they will eventually, it will take years not days for people who hold on to recover their capital value. Let this market grind its way to a bottom without your capital.
The volume yesterday was weak and the breadth was horrid with thousands of stocks making new lows versus a handful of stocks making new highs. Buyers or holders here beware. This euphoria looks like distribution, where institutions that have been looking for a bounce to exit are selling into strength. It so far does not look like the start of the next bull market.
Beware of blind hope for a quick fix. It just doesn't work that way. And while we are at it, I might as well say it–everyone has to find out sooner or later– there is no tooth fairy either.

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2 Responses to Hope springs eternal- beware of insanity part 2

  1. Anonymous says:

    What am I missing here? Why would the TSX rise to such heights when nobody knows what the rescue plan is?
    The world is entering a downturn, call it what you want; demand for products is still going to drop; jobs will be lost; people will forgo travel, which means less fuel consumption and demand for housing. It will be years before the forclosed will be able to save for the necessary down payments in the event they wish to try again for a home.
    In Canada, the west coast has perhaps one lumber mill churning out lumber; the drop in oil prices will no doubt effect Alberta; housing is so expensive few can afford to buy and who, other than the battered US consumber, is going to purchase Canada's few manufactured items?
    Once again I don't get it.

  2. Anonymous says:

    You are ok. Don't scratch your head. There is nothing to get, 'cause there is nothing rational about these markets.
    Healthy markets don't act this way. This is a freak show.
    In case you did not see this post on Barry Ritholtz's blog:
    http://bigpicture.typepad.com/comments/contrary_indicators/index.html
    note the last time markets acted this extremely. If you are out of this mess be grateful and relax. D

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