it is better to have cash on hand in case their own asset-backed securities become worthless. Even lending it to a __perfect borrower__ is riskier in that case, because even if the borrower can repay, it's no good to the bank if they need the cash in a pinch.
In other words, the issue here is that the banks are reducing their leverage and not because they don't trust each other, which is my main point. If the Fed inject so much money into the banks that they can afford a few loan defaults here and there, the credit market will start to go back to precrisis levels. An interbank lending guarantee without the capital injection won't help much.
Eg. Usually I loan out $1 billion. But now, my risk appetite is smaller because of my desire for a smaller leveraged balance sheet, hence i will loan out only $100 million.
So even if I trust that you are able to pay back the loan, I will no longer lend to you because I have no desire to lend so much anymore. The overall credit supply decreases.
Maybe my initial post was not clear, I believe the main reason for the tight market is this: Constriction of desired leverage -> Decreased credit supply
Eg. Assuming the precrisis loan-to-cash mean leverage is 500%, USD 100 billion of cash can yield USD 500 billion of loan supply in the credit market. Now, the loan-to-cash mean leverage is about 200%, so the same USD 100 billion of cash will yield only USD 200 billion of loan supply. Thus, the Fed has to print a lot more cash to restore the precrisis credit supply. The announced capital injection is not enough. They have to inject a lot more. If they don't wish to print that much cash, the Fed can be the direct lender and assume the precrisis leverage themselves.
I think it's time to dismiss one of the falsehoods perpetuated by MSM and this article: that the main reason why the credit market is seizing is because banks do not trust each other.... wrong! the real reason is they either don't have any spare cash or that they have no more risk appetite to lend.
The UK market would make for a good case. With interbank lending guarantee by the govt, you would expect the credit markets to resume flowing, but it has not materialized. The banks have made a decision to lend less and deleverage.
So don't expect the capital injection by Paulson to make the banks start lending. They won't. Which is why the Fed will have to go into the markets and be the direct lender (which is what they did in the commercial paper market)
There's a reason why those trailing P/E are lows. The E will decrease drastically in the future. You have to make really good guesstimate on what the E will be in the future before you can determine whether it is cheap.
There's a lot of danger in picking stocks based on P/E. You have to look at their debt ratios and short term financing requirements. You should avoid highly profitable firms that use crazy leverages in achieving these high returns.
An almost risk-free way to money in the stock market is to put most of your money in fixed income while apportioning a small % in long dated options.
Eg. you think Morgan Stanley is dirt cheap at current levels ($10) and you are willing to invest $100,000 in them.
Action 1: You bought $100,000 worth of MS shares at $10 each
Action 2: You bought $90,000 in bonds that yields 11%. You bought $10,000 worth of Jan 2010 MS 5 call options at $7 each.
Scenario 1: MS gets nationalized or goes bankrupt
Action 1: You would have lost almost all of your $100,000 investment.
Action 2: If you hold out until your bond mature, you'll get back your $100,000 principal after 1 year. Your options is worthless.
Scenario 2: MS goes up to $30
Action 1: Your investment is now worth $300,000
Action 2: You get $100,000 from your bonds and your $7 options is now worth $18. So your investment is worth $125,000.
So Action 1 is very volatile and risky. Your profit range from -100% to 200%.
Action 2 allows you to sleep soundly at night, even during current market conditions. Your profit range from 0% to 25%.
Hey not bad at all. In the worst case, you'll have at least preserved your capital.
Here is my experience. I used Rails for one project of mine that requires processing of millions of data rows. Because the Rails ORM create an object for each data row, we end up using a lot of memory. We had to get a 2GB memory server to hold up the project. Even after we avoided the ORM (which removes the pleasure of coding in Rails), the memory usage was still high.
Sure, we could process the data rows outside of Rails in C but because the processing of data rows is an integral part of the project, that would mean coding 80% in C and 20% in rails. Not exactly an enjoyable experience.
So we rewrote it in PHP and avoid objects and use just functions and hashes/arrays. And it worked very well for us. The site render time drops from 0.8s to 0.03s. Memory usage rarely exceeds 100MB.
In other words, the issue here is that the banks are reducing their leverage and not because they don't trust each other, which is my main point. If the Fed inject so much money into the banks that they can afford a few loan defaults here and there, the credit market will start to go back to precrisis levels. An interbank lending guarantee without the capital injection won't help much.