Nightmare on Dow Street & the shadow of Deep Depression

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Sep 18 2008
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Shorties are laughing all their ways to the bank. That’s right! If you’re one of the traders or investors who were and still are not convinced of the $85 billion American International Group Inc.’s (NYSE: AIG, stock) rescue plan by the U.S. government, you should be rejoicing by now, provided you short the stocks or bought some Put Options. In fact almost any stocks you shorted would have yield fruits by today. It’s pretty hard isn’t it? On one hand if the government does not bailout the financial institution it could collapse and affect many life but after it did that investors’ fear many more companies would face the same fate (bankruptcy). It was a “lose-lose” situation for the authorities.

Every regional stock exchange depend very much on U.S. economy and practically all the bourses fell in tandem with Dow Jones which tumbled about 450 points. It was a complete collapse of confidence and the thing that is playing on every investor mouth is – if the largest insurance company can fail then any grandma can tell you that no one is safe. While the stocks collapsed, the rush for gold pushed the metal by a whopping $90.40 to $870.90 (Dec delivery) an ounce. But where does Uncle Sam come up with such a huge sums of money for the multiple rescue plans? The U.S. government has to tap its reserve and borrows elsewhere. The Treasury Department was asked to sell debt on behalf of the Federal Reserve.

US Treasury DepartmentAlready the Bush administration is projecting a deficit of $480 billion for the new budget but with the bailouts the deficit could ballooned but it’s not something that Bush will need to worry because the baton will be passed to the next president. You’ve stimulus checks totaling $168 billion, Treasury’s $200 billion for Freddie and Fannie, $29 billion loan for Bear Stearns, $85 billion for AIG and God knows how much more are needed. Japan’s central bank has injected another $24 billion for the sixth time this week bringing the total of injection to a mind-boggling $76 billion in order to flood the market with sufficient cash. If you think the economy tsunami has settled then you might be wrong (long live shorties!).

Let’s hope this does not materialize but New York Mayor Michael Bloomberg warned the “next wave” of financial pain may come from overseas if foreign entities stop buying U.S. debt. Fortunately so far foreign investors are still willing to buy U.S. debt but Bloomberg was concerned that a prolong credit crisis in the United States may scare off these buyers ultimately. The joke of the town is to make money by betting which is next to fall. Washington Mutual which once considered by many as the Starbucks of banking is rumored to be the next to be affected. Washington Mutual’s stock price is now lower than that of a latte. The havoc in the U.S. financial market is so bad that even the $60 billion Reserve Primary Money Fund, one of the oldest money market funds in the country, has become the first money-market fund in more than a decade to lose money because it was forced to write down $785 million due to losses in Lehman Brothers paper that it held.

DJIA plungedThe sentiment on the trading floor is such that fears still dominate the overall stock market and any rebound on sight will be met with selling. Even if the Dow were to rebound 400-points today investors are not ready to show their hands. Meanwhile Malaysian stocks finally breached below the important 1,000-level to close at 991.66-level. Volume was relatively high at above 550 million shares but it was a result of foreign selling. With Dow and KLCI went down below 11,000 and 1,000 respectively, would the PM Abdullah Badawi goes down as well as the weakest PM the country ever produce? Sure, he has just chickened out and refused to call an emergency Parliament session as requested by opposition leader Anwar to deliberate on a vote of no-confidence against the PM.

It’s pretty simple really – if the PM is damn sure Anwar was playing high-stake poker and was bluffing from the start about forming the new government, by all means the PM should just call for a vote of no-confidence and put to rest once and for all that Anwar is indeed a big-time liar, unless of course the PM knew very well that Anwar actually has the numbers in his pocket. The more the PM runs away from Anwar the more people will believe the latter. Badawi should just confront the reality and move forward instead of intimidate with ISA’s threat. It won’t help the country’s economy to have a weak, incompetent, indecisive yet arrogant, stubborn and power-crazy leader walking the corridors of power.

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