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« The Fed Minutes: An Answer to the Question of "Duping" | Main | Wall St. Meltdown: A Musical History of 2007 »

February 21, 2008


RecessionStock Trading

Nice article,It helps to see your strategy and I continue to develop my own trading style. Thank you so much for this invaluable information.

What is 'Recession Proof'?

You can almost hear the wallets snapping shut. Folks are cutting back on their spending every way they can.

According to those who know, we are either in a recession, or are about to be. I would hate to be trying to sell real estate or new cars right now. Talk about hitting your head against the wall. Ouch!

That got me to thinking of what businesses make sense during a recession. Certainly health care does. Baby boomer's are going to need every kind of health care imaginable. For all I know, economic bad times makes people sick too.

Other types of businesses that should be recession proof include vital home repairs, like plumbing, electrical, and roofing. Folks can't put off fixing a clogged toilet or a leaking roof just because they're a little short on cash.

And you know what they say about death and A well-run funeral home or a tax consulting business shouldn't be hurt by an economic downturn.

But all these jobs require training, and even certification. And that takes time. By the time you've learned one of these trades, the recession may well be over. That got me to thinking about one business that's truly
recession-proof, and you can get started almost immediately: Day Trading.

Day Trading refers to the buying and selling of stocks within the same trading day. I now what you're thinking: how can a day trader be successful when the stock market is down, day after day? Well, day traders profit from volatility - when there are big swings in stock prices, there is money to be made.

It used to be that Day Trading was only done by financial institutions with access to technology and information. Now, almost anyone with Internet access can become a day trader, if they know what to do.

Manny Backus

Turley Muller


Thanks for taking the time to respond. I really appreciate it. You offer some good direction.

I guess is we, as society, and the markets, are always in a state of flux. We continue to improve our financial markets, but in doing so we create new challenges as well.

I was a MBS Trader and we have very liquid, efficient mortgage markets.
Obviously, when banks create their own proprietary securities and own markets, and the supervision is spotty, then problems can arise.

I agree with that securitization is a good idea, it matches borrowers and savers well. I also agree that implementation has been mediocre. We'll have to see what changes will be made to rectify issues.

Thanks for sharing your outstanding insight.



Turley - Let me begin by thanking you for such a thoughtful comment.

My general approach here is to inform -- analyzing the behavior of key government actors so that we can all make winning investment decisions.

I do have opinions about what is right, but that is not my purpose here.

Given your invitation, I will indulge in a few observations.

It is easy to criticize the Greenspan Fed for cutting rates too much. The critics are not really looking fairly at the problem faced at the time. Much of the Street commentary focused on global deflation. That was the threat, and that is what they addressed.

What ensued in SIV's was an unintended consequence, and we will now spend some time figuring out the responsibility for it.

My view is that the securitization of mortgages is a good concept, poorly implemented. The originators had no incentive to vet the clients. The supervision was lax. The packaging by the Street was deceptive. The ratings were poor.

What have we learned? A "solution" to the housing and mortgage problems includes enhancing the ability of qualified borrowers to get loans. Many are working on this problem. There will be a solution.

I realize that this is not a complete answer to your excellent questions. It is more like an agenda of things to watch.

Thanks again for a very thoughtful comment.


Turley Muller


extending the "teaser rates" is what the "bail out" prescribes. The ARMS at risk are the sub-prmie 2/28 and 3/27. Prime ARMS such as 3/1 & 5/1 were to reset now, the rate would likely fall since the margin is usually 2.25% over LIBOR.

Sub-prime margins typically are 6-8% over LIBOR, without caps and with pre-payment penalties. Before the fed cut rates, sub-prime ARMs were reseting to 11-13% with some having original rates 6-7%.

The government asked that servicers freeze the original rates for borrowers more creditworthy and have the ability to pay. Less capable borrowers won't be aided thus doomed to default.

The issue is that servicers are hesitant to freeze rates because of potential lawsuits. Their fiduciary duty is to uphold the terms of the promissory note owned by investors. Only to intervene mitigate losses certain to occur when possible.

For investors- there can be mixed opinions. Some may be more exposed to the interest payments and some more exposed to principal, depending on pay-out structure- (IO or PO striips etc) and of course this all depends on the securitization and what losses are guaranteed. It's so complex and broad, there is probably not a solution to please everyone.

Investors are expecting the higher interest payments upon, and some CDOs were structured with that expectation. Sub-prime can be used as a credit enhancement tranche, using the high interest payments to back losses in the high quality tranches, turning A into AAA. Some securitizers expected interest from the supporting tranches to exceed payouts on losses on the quality tranches to keep for themselves.

In reality, this freeze only helps those who can help themselves, for the most part.

The losses you mention-write-downs. Those are non-cash or unrealized losses. Some of this is from the marks on assets on the books. These securities are not trading. There is no appetite and available capacity for adding risk to these bank's portfolios. Thus, they re sitting on them, and only at a steep discount will they buy. The incremental cost for risk is a steep curve because of risk guidelines these institutions are expected to adhere to.

Market prices don't reflect the value of the assets, yet FASB requires marks to market. Where there is not market prices or indications of like instruments, assets are marked to model. Level 3. These assets have caught tons of Sh- Because values were higher then level 1&2 assets, and folks accused banks of inflating values because its a subjective method. This pressure results in the write-down of L3 less than models indicate because of the perception they are bogus. I don't buy it.

I believe these losses won't be as high. Foreclosure sales write-will recapture losses. I've remember all the chatter on CNBC saying these loans are worthless, at very best 20-30c on the $. Assuming 100% default and recapture of 50% the value would be 50c on the dollar. Historically, recovery rates have been 75-85c on the $ and the riskiest loans had defaults rates of 20-30%. So, that;s a big stretch to assume there's no value. (HE excluded)

Banks know they will recover more from unwinding portfolios though attrition than dumping them on a market absent of capable and wanting buyers. It's not so much the conspiracy theory that banks are holding on because they don't want investors to know what the assets are really worth, hiding behind "marking to myth"

I believe if we need to let natural economic forces to work this out . Players are motivated to maximize rewards and minimize costs, so the banks are working to clean up with minimal losses.

Lenders/investors - provided value to borrowers seeking loans above their capacity. These borrowers were willing to undertake the risk, the market matched up lenders with equal risk tolerance, Both parties received want they wanted.

The FOMC intervention is largely responsible in my opinion. Fighting off deflation concerns and low GDP, FOMC cut rates so low that it encouraged risk-taking, then inflation concerns caused FOMC to increase rates to high too fast eliminating risk taking.

Switching from a financial system flush with risk seekers to an environment with risk avoidance, when levels of risk units are still awash in the financial channels, it's likely to hose up.

I don't know, that's my opinion. The market's take is so fluid, and promulgated by mass media, politicians, and other high profile folks with an agenda. It's tough to get a true grasp of the situation.

Doc, your thoughts?


"A good question is whether the top-down analysts, whose methods are not very well described, are actually better than those following the companies."

Historically, that has proven to be the case, as a blog which emphasizes the behavioral aspects in finance would concur.


I feel we are looking at this problem through the wrong lense...these banks are writing off or down billions in loans...yet on these ARMS ...they were willing to extend teaser rates for some period of time...what I don't understand is why not keep the rate where it is...continue to take the income...maybe extend the term of the loan to 40 or 50 years and everyone is happy...those homes that are upside down have a high probability of increasing back to original values or higher...and the losses are minimize...this willy nilly attitude to just write down accounts seems unethical at a minimum but even more worrisome is it seems to be a sign of laziness...and maybe even calculated in that if the banks and financial institutions create enough of a crisis the government will revisit the solutions of the 80's ...Resolution Trust...

Something smells here...especially when I talked to people who in their ignorance signed these stupid loans...can't get a decent work out without failing to pay a monthly payment or two...

Those who played the game the banks should be made to clean it up with the least amount of is like holding on to stock for the long term and waiting for the company to fix issues or rebuild itself

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