End of Wall Street as we know it

[flashl]

Financial firms have relied on a highly flawed business model for years. The time has come to fix it.

(Fortune) -- Until the recent tempest, Wall Street firms looked like just about the world's best businesses. Year after year, they posted sumptuous returns on equity, ever-rising share prices, and if you believed their claims, a new breed of CEOs who'd mastered the art and science of risk management. True, it was hard to decipher exactly how they made all that money. But make it they did.

...

The truth is that they've been relying on a highly-flawed business model for years. Put simply, Wall Street firms used towering leverage to make tons of money in a long-running bull market that blatantly underpriced risk. At the same time, they handed a huge chunk of the gains to employees in the form of excessive pay.

...

So what's the solution? First, Wall Street must return to its roots in fee-based businesses.

Second, the current leverage ratios are irresponsible, and must come down.

Third, the compensation system must be revamped so that traders and managers bank their bonuses forward, so that they're only released if the firms are profitable over a sustained period of say, four or five years, not a single year.

...

It was only the artificial separation of investment and commercial banks that kept the Wall Street firms independent for this long. But Wall Street has blown it. Over time, big banks, boasting far more capital and far more discipline, will tame Wall Street. It just happened with JP Morgan (JPM, Fortune 500) and Bear. And that's just the beginning.

Fortune

[The Backlash Cometh]

1. Is it really the end of Wall Street? Or is it the end of capitalism as we know it?

[selador]

3. *get * *REAL*

this same song and dance has been said in EVERY market crash (1929 and 1987) specifically come to mind

the market goes through cycles.

always has, always will

happened LONG before the US stock market even existed...

see: Tulip Bulbs.

and btw, the tulip bulb market is still going strong centuries later

this is part of the reason why retail traders lose money . i say this as a trader who trades nearly every day and has done so for years.

retail traders are almost always most bearish near bottoms and most bullish near tops.

a couple of days ago people here were calling for "black monday". dow opened gap down over 200 and promptly filled that down gap.

fwiw, over 3/4 of my trades have been short since christmas. iow, i have traded with positioning such that i make money when the indexes go down. and it's been very profitable. i am hardly a raging bull right now.

but the more gloom and doom i see from retail, the more i realize that plus ca change...

feel free to research some of the headlines after black thursday in 1987. (when we saw a massive one day drop in the indexes)

same syndrome.

capitalism is the greatest wealth producer known to mankind. it aint going away. thankfully.

and wall street is a great way to participate in it. you can participate with a few hundred dollars. commissions have never
been lower. in the 80's etc. it WAS a rich man's game. commissions were regulated and insanely expensive. futures trading was for the big boys only. stock commissions were insane. churn and burn. now, it's open to everybody with a few extra dollars
the BEST advice i ever got was to dollar cost average into a basic index fund every month. i've been doing that since i was 18. through all sorts of boom and bust. it never changes.

and it works both ways. people were just as insanely illogically bullish in 1999 - 2000 as they are bearish now.

personally, i would LOVE to see another 1-2 k drop in the dow. but i most definitely wouldn't bet on it

[girl gone mad]

4. Have you seen the rate on...

3 month treasury bills?

I would forget about using stock market pop psychology as any kind of indicator right now. It doesn't matter what people are saying or what the current mood is. Fundamental economic signs are pointing toward the imminent deflation of most illiquid assets, including stocks. A 2000 point drop in the DOW seems very possible, though it may take months to get there. It seems like Japan's decade long deflationary cycle may be our economic future.

[selador]

6. yes

"3 month treasury bills?"

yes

i also watch the putcall, the TRIN, the TICK, the Adjusted Tick, the 30 yr, institutional capping, the commitment of traders reports, the currencies, the advance-decline, and the foreign markets.


"I would forget about using stock market pop psychology as any kind of indicator right now. It doesn't matter what people are saying or what the current mood is. Fundamental economic signs are pointing toward the imminent deflation of most illiquid assets, including stocks. A 2000 point drop in the DOW seems very possible, though it may take months to get there. It seems like Japan's decade long deflationary cycle may be our economic future."

and i'll say again. i trade the tape. every day i'll take multiple trades. usually some short, some long. this is how i make money.

i am also saying that the more retail traders i hear calling for armaggedon, and the more insanely bearish opinion polls, etc. i see the less i pay heed.

i LOVE bear markets, and prefer the markets that go down (for my style, shorting index futures is just the best way to go) and there is NO doubt some choice money is to be made shorting into strength.

do not misunderstand me.

but i also had one of my most profitable days in the last 12 months going long on "black monday" for over 250 pts straight up. so, this market can be played both ways

[sendero]

5. Well..

... the market will, over the next year, lose more than 1-2k on the dow.

These stupid little rallies that happen every time the Fed cuts are absolutely meaningless, having nothing to do with the real economic situation.

Well, they ARE good for taking short positions.

Just keep telling yourself this is a 'downturn' or a 'correction' or a 'selloff'. If only it were that simple.

[selador]

7. then IF

"... the market will, over the next year, lose more than 1-2k on the dow."

if that's the case, then you have a sure fire way to make money

liquidate all longs
and

go long DXD (inverse dow jones 2x leveraged fund)

fwiw, i'm not saying it's a downturn.

for the 100th time, i'm saying it's a BEAR MARKET.

and have been consistently going short (mostly) and some targeted longs since christmas.

i LOVE bear markets

but people are coming in here saying it's the end of capitalism, gloom and doom, armageddon, etc. and it reminds me of the insane bullishness in 1999-2000

retail traders are so routinely on the wrong side of the trade it's ridiculous.

but again, if you are SURE it will lose more than 1-2k than stop "predicting" and start trading. liquidate all your assets and go long DXD so you can make money off your 100% prediction

i'm a trader. i don't have to be right all the time. i just have to cut my losses and keep them small when im wrong, and press my edge when im right. much like nolimit poker in that regards.

it's made me money for years. when i started making money was when i stopped being so sure and confident about my predictions, and instead learned how to manage my risk when i was wrong

long OR short, the market can remain irrational longer than a stubborn trader can remain solvent

[abelenkpe]

8. Psst.

It doesn't really make you look good bragging about how you understand the markets and are making money off it going down while ordinary people are losing out. You're smart, but you might want to add a bit of humility and/or compassion to your messages if you don't want people to just write you off as an arrogant a**. Just sayin'....

[selador]

12. good point

i'm just by nature a contrarian at heart.

that shouldn't mean i should be "mr. shadenfreude" when i'm right.

turning humility meter/limiter on!

:)

[melody]

9. Thank you for coming in here with rational, sound advice

People just love to read and hear about the end of the world.

And you're not arrogant, as someone else suggested -- you're obviously better informed. That's a good thing.

[sendero]

11. Better informed..

... as in listening to the MSM and the CNBC, who was touting Bear Stearns two days before it folded?

I don't think it's the "end of capitalism", but it IS the end of America living on credit. You might not think that is a big deal, but I do, since we are so addicted to it right now.

[selador]

14. electronic crack...

cnbc (and to a lesser extent ... bloomberg) are electronic crack. entertaining, but useless for real time trading info...

if anything, i want to FADE cnbc. if they are insanely bullish, i get scared. if they are insanely bearish i want to buy.

i agree about credit. our savings rates are abysmal.

[dixiegrrrrl]

23. most X-cellent analogy

just as addictive, just as little understood how it becomes and stays addictive...

well put...

[Lucky Luciano]

27. I find Bloomberg quite useful.

My BBG terminal is very handy for sending messages to other traders and sales traders and getting info immediately. I like seeing the real time blips of news and all the incredible amount of past data in BBG is quite useful. I like the VAP, IOIA, GRT, ERN, ANR, AQR functions and many many others. Even fi you do not have sophisticated quants, you can still get a good handle on the value of most derivative contracts with some of the valuation functionalities in BBG. An ordinary vanilla option can be valued using the OV function - and it will calculate the delta, gamma, theta, vega, rho, etc for you. Also, more complicated basket derivatives and structured products can be value too if that is your game. Also, if you trade OTC contracts, doing so without a BBG terminal is quite hard. You need it to get the runs from the sales traders - I get over 4000 emails a day through the BBG trying to find useful info anfd and trying to find out who has the axe in various names.

I must say that I like the XLF short I put on in size five minuted before the close yesterday. I actually shorted some the second that CIT was halted yesterday and it initially went my way, but then it came back and I covered for a 12 cent loss per share because the reaction I wanted did not come to fruition and because of another critical technical reason - the S&P rebalance was going to be effective at the close of business yesterday. Our studies had shown that the rebalance would cause a couple billion dollars in excess buying in large cap financial names by index mutual funds. MER and C had some of the largest buying that would be required by these index funds - and these two firms still have a lot of explaining to do and still have some more writedowns coming their way. They were up HUGE (particularly MER) based on this rebalance technical and general financial bullishness for the day. That outperformance will now be met with underperformance as buyside desks unwind their rebalance trades - many will try to capture this relative underperformance by putting on the exact opposite trades (if they have not done so already with some Market on Close/Limit on Close orders yesterday). Shorted with an avg price of about 26.50ish. Then the ETF was closed out at 26.32 in the last minute as people sold their financials into the excessive buying by the index funds. We shall see. I could easily get boned, but I like my odds....someone else will be watching it for me on Monday - I am going to St Lucia next week for some much needed R&R with the girlfriend...I feel like I have been through a war the last year. Hopefully it will be a good year (not so good last year as I made half of what I made two years ago).

[melody]

15. What does one thing have to do with the other?

Everything is a guessing game, but just because it's in the media doesn't make it informed
-- or uninformed. I saw the Bear Stearns piece you are referring to. It was a toss-off,
stupid remark. Someone with understanding, context and specifics is more likely to be right than someone
hand-wringing for their own amusement whether their dark generalities come true or not.

[selador]

16. much

the markets are cyclic, chaotic, and fractal.

my point about CNBC is that they are just fluff for the masses. very little useful info from watching them. waste of time imo.

[melody]

17. That was actually my point, too lol

I was referring to the poster comparing your post to CNBC.

[selador]

18. wh00000sh

went right over my head!

[truedelphi]

29. Some people don't want to look at the dirt under the rug

Or the fact that the economy is a house of cards being held together by Super Glue and the first rain storm that hits can take it away.

[Hannah Bell]

10. capitalism is the greatest wealth producer known to mankind.

for who?

[selador]

13. for the masses... n/t

[Hannah Bell]

19. what kind of wealth?

which masses?

[selador]

20. what kind of wealth?

the kind of wealth that you can buy stuff with.

which masses? preferentially, those that choose to individually invest.

overall. the economy and society as a whole

[Hannah Bell]

21. The capitalistic masses of guatemala

salute you.

[Hannah Bell]

22. The capitalistic masses of haiti as well. n/t

[joeglow3]

24. So capitalism blows unless

All 6 billion in the world get to live in mansions?

[selador]

25. to paraphrase

capitalism is the worst system out there

except for all the other systems :)

[Hannah Bell]

26. more stuff

= / more wealth

[truedelphi]

28. Uh back in 1987 we did not have 500 TRILLION dollars

posted to the derivatives market. This is very different.

[phantom power]

2. "it was hard to decipher exactly how they made all that money"

That should have been the first clue. It's not generally hard to decipher how an honest business makes money. You sell a product or a service. People pay you more than the cost to provide it, and you call the difference "profit."

Anything much more complicated than that should probably be immediately made illegal, or at least heavily regulated.