Stock Market Up on Tuesday.
As I pointed out yesterday, usually the stock market is up following a down day in the SP 500 of 5.5% or more--on average up 3.5% on the first day and 1.6% on the second day after such a big down day.
At 2:25pm ET, the SP 500 is up 4.6%, the Dow is up 3.9%, and the NASDAQ is up 4.4%.
As to the bailout plan, I was modestly in favor of it until I read Dodd's proposal, which turned me against his version of the bill. But by Monday, every particular provision that I objected to (including the relatively obscure ones) were removed from the bill. After that, I went back to being modestly in favor of it. But I still am not confident of my view on whether on balance it is a good thing or a bad thing.
Why? Why push for a stop-gap solution when the real problem (centered on Freddie/Fannie) has not been fixed? If Freddie/Fannie can keep polluting the MBS stream with bad loans due to negligent or reckless oversight, how will the bailout help anyone?
What's especially interesting to me is that the fallout is different from prior such crashes, although the feds aren't really talking about that. You see, prior such crashes hit the commercial banks, and the resulting liquidity crunch among them caused lending to consumers and small businesses to cease, leading to recessions. But this is different - the liquidity crunch will directly affect only the i-banks and large institutional investors. That may lead to a dry spell for venture capital (caveat: it won't affect the angels, hedge funds, and v-cap funds as much, so there will still be a lot of lending to startups), and IPOs are in for a bad time, and the institutional investors will get slammed (so some pension funds like CALPERs may get hammered). But that effect is more than one-step removed from consumers and small businesses. Indeed, large corps will still have a bond market to access loans, and mortgage money will still be out there for qualified buyers.
Indeed, the biggest threat would be that the entire secondary mortgage market would essentially melt down - and we would return to the early 1990s (relying on commercial banks for mortgages, banks who intend to hold the mortgages long-term, would result in slightly higher interest rates and sterner credit checks and, at absolutely worst, the sort of local liquidity problems that we last saw in the mortgage markets in the late 1970s).
In short, the feds/establishment has been pushing this bailout like crazy, but I continue to harbor serious doubts as to whether the crunch will affect the commercial banks (and, thereby, the wider economy) too critically. I see the fallout hammering certain large investors and i-banks (most of whom have now sought the shelter of the commercial banks, so they'll survive in a smaller form).
So the question in my mind is, regardless of the $$ amounts involved and other such details, how do you build in sufficient transparency and accountability to make it worth the risk of supporting the bailout?
How, exactly, are they "trying" to do so by buying more equity? Unless mutual fund managers have the power to manipulate stock prices (in which case, they would be wildly rich already since they could buy low, manipulate the price high, sell, and repeat), buying more stock just moves balances from the "cash" ledger to the "stock" ledger.
Second, look up the "January effect" -- once a few smart hedge fund managers figured out that market inflows from institutional investors increase in January, they managed to completely arbitrage out any price effect so that there is no perceptible price change even as institutions are buying more. Methinks they would have long since figured out a "last day of the quarter" strategy.
Are we getting good advice or are Big Gov and Big Finance just pushing the mark?
Suppose the market goes up modestly or just stalls where it is. Is there anything in that to justify the Doomsday scenarios we've been treated to? Or to require a bailout?
Not if, as reported, the rise in the market is attributable to investors' hopes of an eventual bailout.
It's quite easy and there is no manipulation involved. You clearly have never traded a single stock/etf in your life, have you?
After yesterday's massive selloff, a fund manager (or anyone else for that matter) simply enters limit buy orders for the closing price or just above it for whatever stocks/etfs he wants to buy. Shortly after the market opens, the limit buy orders are quickly fulfilled. Immediately afterward, the fund manager then enters limit sell orders for the same stocks/etfs he just purchased at a price level that is now a few dollars higher than what he just purchased them for. The fund manager then sits back and monitors his stocks/etfs, maybe surfs Volokh Conspiracy a little bit, reads Black's Law Dictionary, or whatever. If the fund manager has set the price for the limit sell orders too high, he can modify the orders at a lower price but still high enough to make a profit on the entire trade.
For example, I have been monitoring Vanguard Emerging Market ETF (VWO) and Vanguard REITS ETF (VNQ) for quite some time since they had been flirting with their all time lows for a few weeks. Yesterday was a godsend because VWO hit a record low and VNQ came close to hitting its record low. So, when I learned this morning that the futures were pointing toward a higher opening at market open, I set limit buy orders for X number of shares for both VWO and VNQ at a price pennies above yesterday's closing prices. If VWO or VNQ had declined further today, it would have been no big deal because my limit buy orders would not be triggered unless they increased. However, VWO and VNQ did increase upon market open and my limit buy orders were fulfilled.
I then set limit sell orders for both VNQ and VWO at yesterday's closing price. By mid afternoon, VNQ hit yesterday's closing price triggering my limit sell order thereby giving me a profit of about $2.50 per share. (VNQ subsequently increased $1.25 per share so I could have made a larger profit per share but why be greedy. Pigs get greedy while hogs get slaughtered.)
By 3:55 today, VWO had not yet hit yesterday's closing price so I simply modified my limit sell order and turned it into a market order that is processed immediately. Thus, I made a couple of dollars per share on VWO today as well.
Now, a couple of dollars may not seem like much, but it does when one is trading a large volume of stocks/etfs. Happy trading, everyone!
There is no such thing as a foolproof system. If a hijacker had commandeered a plane and flown it into the Sears Tower at 11:00 a.m. after I had purchased VWO and VNQ, well then I likely would have suffered losses today.
However, there is no dispute that yesterday's selloff was incredible. Furthermore, the futures this morning were pointing upward. Moreover, VWO had hit a record low and VNQ was near hitting its record low. Record lows in a Bear Market and 52 week lows in a Bull Market are targets of opportunity for a trader who is willing to take on risk.
So this system makes money if the stocks you buy go up? I gotta say, that's a unique feature.
when I learned this morning that the futures were pointing toward a higher opening at market open, I set limit buy orders for X number of shares for both VWO and VNQ at a price pennies above yesterday's closing prices....
I then set limit sell orders for both VNQ and VWO at yesterday's closing price. By mid afternoon, VNQ hit yesterday's closing price triggering my limit sell order thereby giving me a profit of about $2.50 per share.
So you set the limit sell price below the limit buy price. Both orders were filled, yet you made a profit? How does that work?
I think you meant to say you set a limit sell order at yesterday's opening price or am I missing something? Since vwo was above yesterday's closing price all day and a limit order at that price would have been immediately executed.
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