NYT editorial: Stock market's rebound was as troubling as Tuesday's rout

[DeepModem Mom]

After the Sell-Off
Published: March 1, 2007

....investors have a proclivity to hear what they want to hear. On Tuesday, warning bells were simply too loud to ignore, including the steep sell-off in stocks in Shanghai, downbeat reports on the United States economy and an attempt in Afghanistan on the life of Vice President Dick Cheney. Yesterday, investors needed only the slightest prod to revert to “hear no evil” form.

The more complete answer is also more troubling. In recent years, as housing and stock markets surged, even highly speculative investors have been encouraged to an unusual degree by their bankers and regulators, who are supposed to restrain investors’ more maniacal bents, but instead have done little to quell or question excessive risk-taking.

Just last week, Treasury Secretary Henry Paulson Jr. and top financial regulators said the government need not — and should not — provide greater oversight for the $1.4 trillion hedge fund industry, or, by extension, the trillions of dollars more in complex derivative transactions spawned by the industry. That stance is mostly free-market ideology run amok. But it is also based on the unproven assumption that unregulated investing, which dispersed risk and reduced volatility as markets surged, will continue to do so when markets tank.

The upshot is a one-sided bet for investors. They have explicit assurances from regulators and policy makers that almost anything goes when the markets are hot, and implicit assurances — based on past experience — that the Fed would lower interest rates to contain a financial crisis should one erupt. Unfortunately, there is no guarantee that easing up on rates would have the same powerful effect in a future crisis as it had in the past.

The next crisis appears to be building around weakness in the United States, not in Russia or Asia or South America. That means money could flow out of the country if markets were rattled. That would weaken the dollar and require speedy and complex remedial action by the world’s central banks — not just a rate cut by the Fed. Tuesday’s stock market decline could turn out to have been a garden-variety correction. But major market participants would be wise to rethink their assumptions.

http://www.nytimes.com/2007/03/01/opinion/01thur1.html?hp

[aquart]

1. A graduated capital gains tax to encourage long holding of stocks

Instead of rapid speculation might help.

Did we do away with that brake on insanity?

[TahitiNut]

12. Yes ... and a national sales tax on the sale or exchange of corporate stock.

A corporation is property and the sale or exchange of property is supposed to be what a sales tax is all about. Even a 1% sales tax would slow the insane speculation and Vegas-style gambling with our production capacity.

[aquart]

14. The phrase "national sales tax" makes me a trifle ill.

Is there a less nauseating way to frame that?

[TahitiNut]

15. I'm not fond of that terminology either - the language has been hijacked.

I'm less fond of "stamp tax" ... perhaps "equity transfer tax" would be better? I tend to prefer honest language instead of euphemisms.

FWIW, it's my favorite suggestion for those who propose a "national sales tax" in lieu of an income tax. I say "Fine! Just start with a sales tax on any transfer of corporate stock. Let me know when you get that enacted and we can talk."

A working mother pays sales tax on a box of cereal to feed her children - but a wealthy man could buy controlling interest in Kelloggs and pay no sales tax at all. What's fair about that?

[aquart]

17. I LIKE "equity transfer tax."

Straightforward, yet evasive. Beautiful.

[TahitiNut]

20. Thanks. It'd be nice if we could put the "ownership class" on the defensive, for a change.

Rather than fending off their assaults on working people, I wish we could get our (or are they 'theirs'?) Senators and Representatives to propose such an "equity transfer tax" to subsidize the costs of regulation and enforcement of equity ownership entitlements and offset the extensive costs of WTO, trade 'missions,' and other activities currently undertaken by the federal government on behalf of global corporatism.

There's little question in my mind that investment bankers would swallow their tongues at the prospect of their "free ride" on the backs of ordinary citizens coming to an end.

[Porcupine]

2. Gamblers or the PPT? anybody? nt.

.

[teryang]

3. CNBC investigative piece documented insider trading before...

...each major merger/takeover announcement in the past several weeks. Huge call option volume occurred in each instance the day before the merger or takeover bids were announced. Flagrant criminal activity with absolutely no comment from the SEC about whether they would do anything about it. I've rarely seen CNBC cover flagrant criminal activity like this. Zero follow up to this well document story.

They say that takeover mania is a classic sign of a market top. Given what has happened to the stock prices of the major trading houses, wall street prospects aren't too bright at present.

The instantaneous three hundred point drop in late afternoon was highly suspicious.

My view of this sudden down day is that it is a foreshadowing of further problems to come. American IRAs and 401Ks may be looking at devastation in the near future.

Anecdotally, I perceive a systemic liquidity problem. No doubt there's a dead dog or two underlying the program traders, sitting on a pile of bad debt. This is causing a giant sucking sound. Somebody's got to pay. Interesting that one market commentator recounted a piece written by a wall street operator dated 1843, which outlined how he and two other controlling creditor interests on wall street began short selling in earnest with a strike fund of a few hundred million dollars and then began making margin calls which blew out all the stops.

As I recall from 2000, I expect a few more of these precipitous falls to be followed by an steady inexorable decline lasting several months at least, perhaps indefinite in duration. As pointed out in this article, our nation is in a manufacturing, housing and credit bust. Commerce funded by consumerism is weakening. Overseas manufacturing and labor arbtrage are enough to sustain multinational corporate coffers for now but without buyers at home what happens next?

Why is it that unfair currency practices by Japan aren't challenged but alleged unfair Chinese practices are criticized every day?

[Marie26]

11. Why do you think the

fast three-hundred point price drop is suspicious? Do you mean because it wasn't really a result of server problems, or because its a symptom of a deeper problem?

[teryang]

16. I believe it was rigged to instill panic

I have no evidence for this other than the puzzled demeanors of the experienced observers, who don't even seem to believe or understand the lame explanations they are putting forth. A computer system that routinely handles two billion volume has difficulty handling volume a little more more than twice that?

As I noted these sorts of market traps are planned malice aforethought by the financial houses have hundreds of billions in funds to manipulate market psychology.

[Marie26]

18. Why would they want

to instill panic? It seems like they'd want to keep the markets high as long as possible, right? I know nothing about finance, but the lame "server down" explanation doesn't make sense to me either. The NYSE is not run on gerbil wheels, but the most sophisticated computer networks in the world. It seems like the mega-computer servers should've been able to handle all these trades. I'm sure there's been other times when volume was just as high.

[karlrschneider]

4. The markets no longer represent "investment". They are all legal pyramid

schemes with nothing of intrinsic value to back up their perceived 'value.'

It's kids matching pennies carried to an absurd level and has little relevance to the actual
material world. But it will keep working as long as P. T. Barnum's observation remains in effect.

[youngdem]

5. Make no mistake...The smart money is leaving the market (and going into derivatives, bonds and puts)

Because the fundamentals are simply BAD.

The market is being propped up right now because there is simply too much money chasing too few real winners, inflating stock values beyond what is supported by the PE ratios and potential for growth a company realistically has. The cheerleading will work only for a little cover up. When the problems become undeniable (or when a crisis or scandal erupts) confidence will be shaken more than a Bernanke peptalk can smooth over.

[kysrsoze]

7. I agree. I have shifted more 401K money into an interest income fund

seems to be a little less volatile than bond funds. I've completely pulled my money from the U.S. stock market and am hoping my international funds will be much better at spreading risk. FWIW, I've made more money off the international funds anyway. Then again, if we have a global recession the only safe spot will be bonds and derivatives (if you have access and know how to use them).

[youngdem]

9. It's been hard to lose on an international basket, especially an Asian basket lately

America's market is mature, costs of basic living are going up, wages are going down, taxes are going up, insurance is going up, energy up. End result? NO cash available for growth, savings, investment, spending, creation. And as everyone knows, it is getting MUCH worse. Plus, America's market is heavily realized in most sectors. So, what room is there for huge growth if there isn't a huge change in people's available spending cash?

[buzzard]

10. So is it better to invest in companies that have tangible assets such as commodities or maybe gold

I have been thinking that I might be better off changing my rrsp(401k) into a gic or money market account. The rates are very low but it is at least guaranteed.

[Warren DeMontague]

6. I stopped believing the NYT when they continued to sell prewar Iraq Intel that was already

known to be total bullshit.

Sorry, I'm not gonna crap in my drawers for 'em now. I'll stick with "garden variety correction", thanks.

[kysrsoze]

8. I hope people realize yesterday was not the full extent of the correction

I think the correction is just starting (my readings seem to indicate that) and the Dow will likely drop further. My guess is below 11,000, maybe closer to 10,000. This has been a long time coming, with gains based on speculation and no fundamentals to back it up.

Still, if people want to just keep their money where it is and hold for the long run, everyone should be OK. I'm not anticipating a global depression.

[Skink]

13. You know things are bad when Greenspan steps in.

He's the guy that warns the big guys to bail and leave the little guys holding the ball.

[DeepModem Mom]

19. Kicking, in light of opening today. nt