Black Hole: a region of space in which the gravitational field is so powerful that nothing, not even light, can escape its pull after having fallen past its event horizon. The term "Black Hole" comes from the fact that, at a certain point, even electromagnetic radiation (e.g. visible light) is unable to break away from the attraction of these massive objects. This renders the hole’s interior invisible or, rather, black like the appearance of space itself.
If it ever felt like the market had a black hole, now might be that time! An inescapable magnetism with vampiric tendencies is exhausting the patience and energy of the most steely and experienced stock market traders. In the depths of the gloom and amid the contagion of panic, solace and wisdom can often be found in the words of those who have seen it all before, long before any of us had begun to even dabble. The following quote is from Remiscences of a Stock Operator:
"And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying and selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine – that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money."
Having dipped a little toe in the water this week only to find blood-thirsty sharks hiding under the surface, this quote serves the purpose of reminding not just the reader but the author of the imprudence of ignoring market sentiment. But words tend to be poor descriptors of raw sentiment. Instead pictures have a habit of conveying the heart of an issue. And perhaps, this chart of Fannie Mae in freefall suffices to illustrate the current market woes.
It seems Cramer’s Four Horsemen of Technology – Apple, Google, Reseearch in Motion and Amazon – have been thoroughly replaced by the Four Horsemen of the Apocalypse: Fannie Mae, Freddie Mac, General Motors and Lehman! Scarier than the chart are the fundamentals which we discussed earlier in the week. Freddie is now down over 85% since last October! It turns out Freddie’s market cap is now less than that of Polo Ralph Lauren (RL)! On Sunday the Federal Reserve and the Treasury announced measures to protect Freddie and Fannie. The Associated Press reports:
The Fed said it granted the Federal Reserve Bank of New York authority to lend to the two companies "should such lending prove necessary." They would pay 2.25 percent for any borrowed funds — the same rate given to commercial banks and big Wall Street firms.
The Fed said this should help the companies’ ability to "promote the availability of home mortgage credit during a period of stress in financial markets."
Secretary Henry Paulson said the Treasury is seeking expedited authority from Congress to expand its current $2.25 billion line of credit to each company should they need to tap it and to make an equity investment in the companies — if needed.
"Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies," Paulson said Sunday. "Their support for the housing market is particularly important as we work through the current housing correction."
Even with a ‘bailout’ of Fannie and Freddie, clouds loom in the horizon for former giants such as automaker General Motors. General Motors is now trading at less than 4% of the value of Toyota Motors!
The contagion of pessimism this past week also engulfed Lehman, who suffered a double digit percentage loss. It’s almost as if Lehman has entered a vortex that has so discombobulated shareholders that panic has become all-consuming.
Undoubtedly this time too shall pass. And when it does, those who were most panicked will most likely become most optimistic. And those who remain balanced and patient and abide by the words of Jesse Livermore in sitting tight will be most substantially rewarded over time. This week we shall leave you with the words of Charlie Munger:
The thoughts of others were light and fleeting
Of lovers meeting or luck or fame
Mine were of trouble and mine were steady
So I was ready when trouble came.
- Charlie Munger