Everything.

I said it on the Cavuto show on Friday November 14th – “they will come back to buying the assets because the market needs a bid. It has to find a bid somewhere and nothing will be fixed until it does.” I have said it before in this blog but since getting the &#)@)#? tag cloud to work correctly is one of techno road blocks of my life, I can’t find the exact post. (probably user error I admit).

Anyway – these markets we trade are auctions. If there are no buyers, the price either keeps going down or the seller withdraws the item. Since withdrawing the CDO’s and CMO’s isn’t an option, the auction is always open…and waiting waiting waiting for a bidder/buyer to show up. It isn’t one iota different in process than what happens in a rapidly directional ES or YM move. Not one iota.

Oh yeah, the timeframes are different and the product’s complexity is greater but the underlying idea that a human somewhere needs to be willing to pay something for the asset – i.e. bid on it – is identical.

The reason I bring it up is because essentially thinking through what has happened with these assets and how they have been handled is a slow-motion object lesson in the same high-frequency trading we do everyday. That might sound odd… but think about it and let me know…

I have been wondering since mid-October when they were going to give in and do the basic thing one needs to do to stabilize a market – provide a deep-pocketed bid!

In fact, I said it on the Cavuto show and have said many times since, until the Treasury starts bidding for some of these so called toxic assets, the banks would be stuck. It isn’t that I am SO smart – it is just the basic way auction markets work. Buyers bid up and sellers sell – if one of the other is lacking the price just keeping moving into the vacuum left by the lack of buyers or sellers.

It really doesn’t matter if it is on a one minute timeframe in the ES futures or for homes in Las Vegas…. auction markets need bids in order for the prices to stabilize.

Treasury Acts Ridiculously _____________________? …. fill in the blank.

If the markets are based on confidence (or lack thereof) then where are we in the spectrum between panic and overconfidence? We are certainly on the left-end of this tug of rope. The panicked selling seems to be gone but now we are in a market rhythm where it is just relentless. In other words, there may not be panic but there surely isn’t any confidence that the government funding banks, insurance companies and now apparently the auto-industry is going to work.

Without confidence for the future, we will continue to look towards the lows of October and maybe beyond… is there any reason to do anything else?

and furthermore “Decided that purchasing illiquid assets wouldn’t help” …since when does bringing in a solid bid in a falling market NOT stabilize the market. Paulson may be from one of the great trading houses in the world but he doesn’t get that. The underlying problem in all of this is there was and is no market for the complex debt instruments that are for sale. If someone could make a market then the price would stabilize… and once that happened then the mark-downs on the books of banks would stop and once that stopped, they may be more willing to lend.

…. Can we get a trader in there? Can someone from the Chicago floor environment teach them something about making a market?

PS Thursday the 13th – okay there is the m-t-m accounting issue but they could solve that if they wanted to. I predict that in some way shape or form the new Treasury and Administration in DC will sooner or later end up buying some of these assets. Who else is ever going to make a market in them?