Tom Gregory

Rearranging The Deckchairs

Sunday, October 5, 2008 permalink

It's been nearly one hundred years since the greatest symbol of maritime achievement -- the "unsinkable" Titanic hit the iceberg that sent it plunging to the bottom of the ocean. Without enough lifeboats, nearly two-thirds of the behemoth's passengers were needlessly lost. Arrogance mixed with poor judgment always provokes events to cascade from troubling to dire.

Wall Street may be firmly planted on land, but you know the market is moving full steam ahead in icy water when CNBC's Maria Bartiromo screeches with excitement as the Dow sinks 777 points. For disaster cheerleading, Bartiromo rivals Bond Villainess Xenia Onnatopp who becomes sexually aroused by train derailments.

When the market recovered by two-thirds after its disastrous dive-bomb investors were assured by the parade of bullish talking heads' that, yet again, "It's a buying opportunity". What if that Dow drop was the "bump" passengers felt when the Titanic first hit that iceberg? The crew - just like Wall Street Analysts - assured all that there was no need for concern; the band will keep playing.

Today's financial iceberg is bad mortgage debt. Initially viewed as insignificant on the surface, it
stretches its heft deep into the dark unseen abyss. Under the cover of optimism, mortgage debt ripped into the segregated compartments of credit availability, asset liquidity, bank's willingness to lend, and confidence in our own time-tested financial system. While damage to any one of these could be contained, the combination of the flooding from our financial berg leads to one conclusion - the engine of the US Economy - credit - will stop and the market will sink. Just like rescue ship Carpathia, The Paulson Bailout Plan has come with too high a price and far too late.

After two days of relative calm, the Dow started taking on water. Despite the quieting coos of CNBC's reassurances, we gave back that two-thirds recovery to a sea of sell orders without a whimper of a rally. Why? Because the lifeboats - the banned short-sellers - weren't short enough stocks. As the market fell, no one had a profit or the need to buy back in (short-cover), leaving only sellers, sellers and more sellers.

Show an eight year-old child a stock chart, and they can tell you whether the lines on it are going up or down - a talent that has eluded Wall Street's best and brightest for more than 4000 points of our current decline. Now the market sits precariously - hovering around 10400.

With sales of cars and homes down nearly 40%, it's reasonable to expect that the Dow will soon start reflecting reality and join the economic pity party; we're going to bottom around 8000.

It is ironic that real estate, the cause of the economic collapse, may eventually be the unintended beneficiary of our steep downturn. The Trillion Dollar Bailout makes the US Dollar worth less. When currency loses value, you need more of it to buy the same hard assets. What To Do?

Consider selling your stocks now, then later buy them back cheaper. Buy some distressed real estate. In a few years, it may not be more valuable, but due to the weakened dollar you' ll get a hell of a lot more money for it!