GREED CAUSES MYOPIA?
September 19th 2008 00:00
Fear and Greed are two of the most common adjectives a market newbie will encounter in the stock market. In fact, they seem so common that the word “greed” which, in most conversations outside of the financial world, means rather “unsavory” has somehow lost its grubbiness.
Instead, it becomes a word that describes both good and bad depending on how the word was applied in a conversation. There was a time in this newbie’s life when that word can only mean something bad.
But let us forget about that time. Let the newbie enter the financial world where that word can mean either way and ask the question. Does greed cause myopia?
The question was not borne out of a feeling of superiority as this newbie has always confessed to be…well, a newbie and a newbie cannot be better than the experts. In fact, it is a question that baffles this market newbie.
Here’s how the question came about… According to news reports, Lehman Brothers Holdings Inc. is heavily exposed on the souring housing mortgages. To me that means everything that has to do with subprime lending and all of its derivatives, etc.
Meaning, somewhere along the line the bright boys who were running their business (at Lehman) must have known that they were betting quite a lot of money on sub-prime borrowers who may actually find it hard to repay their loans. They are the bright boys so, supposedly, you cannot discount the soundness of their judgments.
When the miseries caused by the subprime mess reached its crescendo, those same bright boys tried to hedge their losses by going just as heavily on the commodities. And guess what the reports said was their favorite commodity? Oil!
They must have thought that the demand for oil was so inelastic that they can stretch its price all they want and the demand will continue to be there. Well, obviously, that is not the case.
Like what everyone else is saying in the financial market, the outlook is always clearer when seen thru the rearview mirror. Maybe that is the reason why I am asking the questions.
But they are the bright boys. They can look into the future without the aid of a crystal ball. Many of them don’t even need a computer to churn out a series of computations that would tell them what the price of a stock or commodity would be five or ten years hence.
They know their numbers and they know their economics.
How could they, therefore, fail to see that a man with a meager income cannot afford to buy a million dollar house, or worse, two of those houses?
Did they really think that people will drive their cars and continue to consume oil and gas even when they have already lost their jobs and do not know where to get the money to buy their next meal?
How can they even think that they can save their company by killing the economy that gives it profit?
Isn’t that like a man who hopes to grow taller by continuously cutting off his own legs?
Or, is it ever possible that when your mind begins to show you images of enormous wealth, you begin to lose sight of your surroundings?
Just asking.
Instead, it becomes a word that describes both good and bad depending on how the word was applied in a conversation. There was a time in this newbie’s life when that word can only mean something bad.
But let us forget about that time. Let the newbie enter the financial world where that word can mean either way and ask the question. Does greed cause myopia?
The question was not borne out of a feeling of superiority as this newbie has always confessed to be…well, a newbie and a newbie cannot be better than the experts. In fact, it is a question that baffles this market newbie.
Here’s how the question came about… According to news reports, Lehman Brothers Holdings Inc. is heavily exposed on the souring housing mortgages. To me that means everything that has to do with subprime lending and all of its derivatives, etc.
Lehman Brothers Headquarters. Pic source: Wikipedia
Meaning, somewhere along the line the bright boys who were running their business (at Lehman) must have known that they were betting quite a lot of money on sub-prime borrowers who may actually find it hard to repay their loans. They are the bright boys so, supposedly, you cannot discount the soundness of their judgments.
When the miseries caused by the subprime mess reached its crescendo, those same bright boys tried to hedge their losses by going just as heavily on the commodities. And guess what the reports said was their favorite commodity? Oil!
They must have thought that the demand for oil was so inelastic that they can stretch its price all they want and the demand will continue to be there. Well, obviously, that is not the case.
Like what everyone else is saying in the financial market, the outlook is always clearer when seen thru the rearview mirror. Maybe that is the reason why I am asking the questions.
But they are the bright boys. They can look into the future without the aid of a crystal ball. Many of them don’t even need a computer to churn out a series of computations that would tell them what the price of a stock or commodity would be five or ten years hence.
They know their numbers and they know their economics.
How could they, therefore, fail to see that a man with a meager income cannot afford to buy a million dollar house, or worse, two of those houses?
Did they really think that people will drive their cars and continue to consume oil and gas even when they have already lost their jobs and do not know where to get the money to buy their next meal?
How can they even think that they can save their company by killing the economy that gives it profit?
Isn’t that like a man who hopes to grow taller by continuously cutting off his own legs?
Or, is it ever possible that when your mind begins to show you images of enormous wealth, you begin to lose sight of your surroundings?
Just asking.
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Comment by British Bulldog
Good news (for the moment) from different parts of the world. China cuts taxes for investors and a 12% loss in H shares was erased yesterday. The UK bans short selling of financials until January. The worlds central banks add liquidity, the US seeks to ban naked short selling and the congress are working to recapitalise the banks. Banks are consolidating like Merill Lynch did with Bank of America on Mmonday and HBOS did yesterday wioth Lloyd's in the UK with more to come.
This will mean that the rougly 10% falls in world markets this week will be erased in a surge in stock values for a few days in what is known as a bear market rally.
You my recall that I told you a while ago to watch the profit announcements from Lehman,Goldman Sachs and Morgan Stanley this week. One no longer exists, and one may well not exist independantly by the end of this week!
So fundamentally little has changed as banks continue to fail and here BDO and Metrobank admit to Lehman expposure and so set aside billions of pesos for losses.
This bear market rally may only last until the US unemployment figures are announced in the first week of October. Big announcements of job cuts by Hewlett Packard and of course Lehman's are already setting the tone.
So good luck to those invested, but beware beyond the next few weeks.
Regards,
British Bulldog.
Comment by British Bulldog
Interesting blog,
These investors like Lehman in mortgage securities know they will fall, but they want to get in and make money before they do, similarly with oil they get in and drive it up from 80 to 147 then get out before it falls ( in theory). To make real money they leverage it by a factor of 30!!!!!
The most I can leverage is a factor of 2 so check it out on Yahoo.com finance, etf's, Rydex / 2 S P financial short which I sold some of last night and will sell the rest tonight, but probably only for the moment.
Sub prime mortgages are much vilifed today but actually allow poor people to buy homes and dig themselves out of poverty, a very very good thing indeed. The problem comes when house prices fall so they just walk away from their declining asset or unemployment rises so they can't pay the mortgage etc.
So it's not just a question of bad products but a more fundamental truth. Markets rise, then boom and go bust. It is terrible to invest in things at the top of a market and that includes condo's in Makati too right now.
We can't expect unsophisticated people to understand marekt cycles, when I consider my self sophisticated and I've lost a ton of money this year like just about everyone else by being the wrong side of this incredible volatilty all too often.
So chill out Mr Newbie and listen and learn for Warren Buffet did not become a millionaire as a young man.
Regards,
British Bulldog
Comment by Louie
Climate Forum
Climate Red
randomthoughts
Phil's Wellness Tips
I bailed out of it all two years ago because working there became way too much, too many ego maniacs running around for this little black duck!!!!!
Comment by Market Newbie
Stock Market Punk
I believe one of our former professors (instructors) explained the Market Cycles rather well to our class. So, I could say that I have an idea on how it works. Besides, I think I am witnessing a good example of a part of that cycle right now.
We seem to differ a little bit in out opinions today, but I do try to listen and learn whenever I can.
Hey there Louie,
That experience of yours reminded me of a book I read a while back about the people who "couldn't get it" during the dot.com boom (and bust) and the experience of the Global Crossings. You are right about egos.
And blessed were those who refused to join in because they "couldn't get it" which, I believe, included the world's richest W. B.