Yesterday, markets in Europe were closed. But in America, they kept
doing what they are supposed to do - separating fools from their
money.
What is really remarkable - and entertaining - is that some of the
biggest fools are the very same people who claimed to be Masters of
the Universe, the hustlers who work for the financial industry. That
is to say, the separators are being separated from their money too.
And the more you look into it, the more you discover that they are not
masters of the universe at all - but slaves to it; nothing but clowns
in the great human circus...just like us.
Last week, Bear Stearns' shareholders were separated from a lot of
money; in a panic, they agreed to sell out for $2 a share. We
wondered how these accountants, lawyers and market-savvy traders could
have been so wrong about what they had. When the market closed on
Friday they still had billions. When it opened again on Monday, they
had almost nothing. How could it be?
Well, now the geniuses have had time to think; and they've come to the
conclusion that they shouldn't have sold so cheap. And the buyers -
JP Morgan Chase - apparently messed up too. They thought they had
closed the deal, only to find that they'd forgotten to get the key
do***ents signed. So when the sellers wanted to go back to the
bargaining table, the buyers had no choice. They had to up the ante
by 400%. Now, instead of paying $2 a share...they're going to spend
$10, or about a billion dollars more.
So, here is the same question we asked last week: how can such clever
people be so clueless about what they've got in their own pockets? Is
it worth $2 a share? Or $10?
Of course, it is worth what you can get for it. But this is a
financial institution. Its assets are marketable. It should be worth
exactly the net value of those assets - plus the value of the
operating business (typically determined by smoothing earnings over
some period of years and multiplying times a capitalization factor - 5
to 20, depending on what kind of mood the buyer is in).
But in the strange new world we live in, however, it's hard to know
what those financial assets are really worth. "Hence the billions of
dollars sheltered off balance sheets in SIVs and conduits," explains
the Economist . But the magazine goes on:
"That game is now up....the counterparties no longer trust each other."
You wouldn't know it from yesterday's market new, however. To hear
the papers tell it, investors were greatly encouraged by higher-than-
expected house sales and the news from Bear Stearns.
"US stages broad recovery as sentiment improves," is the headline in
the Financial Times . Stocks rose, bond yields fell...and the dollar
worked its way higher. The Dow went up 187 points. Oil held right at
$100.
'Maybe things aren't so bad after all,' they said to themselves.
Or, maybe they are worse.
The reason house sales picked up might be because sellers are getting
desperate. There are still a lot of unsold houses - about twice the
usual number. Sales are a third down from their peak. And building
stocks are about two-thirds below their highs. The stock market tends
to follow the housing market, but with a lag of 20 months, says John
Authers in the FT . "If that were to continue, it [the stock market]
could fall 60% by the end of next year."
Meanwhile, say a prayer for the poor people who labor in the fields of
private equity. Steve Rattner of the Quadrangle Group is in London
this week. "Since July," he writes in the FT , "not a single private
equity deal has been hatched above $4 billion." And deals just done
before "the levers fell off the buyout machine" now threaten to sink
their Frankensteinian creators.
The buyout firms had hoped to squeeze, re-structure, refinance and
flip these deals quickly back onto the same public markets whence they
came. This was what the Economist describes as standard procedure in
the heady last days of the great financial bubble. Finance became a
"game for fees and speculation," it says.
But now, the counter-parties no longer trust each other and no one is
particularly eager to get stuck with these heavily-leveraged private
equity deals. So they end up as "zombies," says the FT - neither
living nor dead - but still drawing breath, salaries and financing
costs. They are the equivalent to the "upside down" houses that are
worth less than their mortgages; these companies are worth less than
the loans taken out to buy them. The Irish telecom - Eircon - is
one of these companies. The French builder - Kaufman and Broad - is
another. K&B was bought, with plenty of leverage of course, at the
very peak. Now, its shares have lost half their value -- which makes
the business worth less than the debt it collateralizes.
All of which makes us think that re****ts of the end of the crisis may
be premature.
*** Gold has been correcting. When we looked on Friday, the price had
dropped more than $100 from the top.
What to make of it? Has it seen its top? Has it now found its
bottom? Or is there more correction to come?
We wish we knew. We were hoping for a correction down to about $850.
"Buy the dips," we kept saying. But there haven't been many dips.
Now, at $918, is this the best offer we're going to get? Maybe.
Remember, we don't buy gold to make money. We buy it not to lose
money. And then, we only buy it when the risks from other forms of
wealth outweigh the hope of profit.
What else are you gonna do with your money? Buy stocks? In real
terms, U.S. stocks have been in a bear market since 2000. This trend
will probably last another 10 years or so. Buy property? Maybe...but
you will have to choose very carefully. Put it in CDs? You will get a
low yield...inflation rates are going up...and you have the risk of a
currency loss.
Gold is no sure thing, either. It went down in price from 1980 to
1999. But there are times when owning gold is safer than other things
you might own. This is probably one of those times.
Until tomorrow,
Bill Bonner
The Daily Reckoning
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