You might have heard of the triple whammy on the US Financial market on Monday and the losses in the stock market. Here are the good and the bad of the out-come:
Good
Oil prices dropped to $93
- This will elevate the stress on inflation, allowing the FED and the US government to focus on combating the failing economy instead of trying to juggle both economy and inflation
Bank of America bought over Merrill Lynch- The merger will create a powerful synergy between US largest depositor bank and stock
broker. Merrill Lynch will have less problems with it's credit problems with Bank of America backing it up
10 banks created a common fund of $70 billion
- This will create another layer of insurance on top of what the central bank and treasuries are offering. This can help banks smooth over any credit liquidity
Bad
Lehman brothers filing for bankruptcy
- Banks and financial institutions around the world who are have dealings with Lehman may be implicated and a chain effect may occur leading to the collapse of other financial institution. However, this is not very probable as the treasury department made it clear that it will not bail out lehman as they believe that it will not create a systematic collapse of the US financial system. There is still a small hope that a buyer may appear to bail lehman out.
AIG seeking more fundings and their ratings have been downgraded by SnP
- AIG invested too much of their funds into property and mortgage backed securities. With the declining prices of the real estate market, the value of these assets just keep falling. The treasury also indicated that they will not bail out AIG. The silver lining is that AIG still holds many profitable divisions and business which they use it as collaterals to raise up to 20 billion. Another possibility is the interest that soveriegn funds may take an interest in it given the strong pressence of AIG in many of these countries.
Bank of America bought over Merrill Lynch- Bank of America may not be too healthy in the future themselves as consumers credit cards and personal loans start to fail. They are still digesting their purchase of country wide, a mortgage financial company a few months ago. So with the purchase of Merill, they may expose themselves to more trouble in the future
The Strategy for Now
The market is grossly over sold. It is due for a technical rebound. Potential good news along the week is that the Fed may cut interest rates below 2% and provide more instruments to help banks cope with the crisis. Secondly, Goldman and Morgan Stanley, the only 2 survivors of the 5 investment banks, is due to report their 3Q report this week. If their report is positive, there may be hope that the Merrill and Lehman disaster are isolated cases due to bad investment decision made by them.
I will suggest that investor wait for the technical rebound and liquidate up to 50% of their holdings into cash. Most of the holdings are 30-50% in stable cash and bonds. I will move a portion into the equity everytime the market reaches a new low. Essentially, by the time the whole crisis is over, we will be able to average down quite a bit using this strategy. In this case, we can still maintain our long term strategy for our UT portfolio and at the same time, actively investing into the bottoms of the market.
Lastly, I like to share this article on Investor's Business Daily on why this is not the end of the world.
Investor's Business Daily
This Too Will PassMonday September 15, 6:53 pm ET Ibd
Wall Street: Old timers will recall F.I. DuPont or Goodbody & Co. Not-so-old timers remember E.F. Hutton and Kidder Peabody. Now we can add Bear Stearns and Lehman Bros. to the storied names that have fallen.
We drop these names (and we could have mentioned a hundred more) for two reasons: (1) to remind readers that this isn't the first time an investment bank or brokerage has gone under, and (2) to point out that the country has always survived and grown.
In fact, what's happening now is quite normal in a financial system characterized by booms that lead to excesses that then require corrections before any renewal takes place. We'd be hard-pressed to remember a bear market when one or more financial firms didn't go out of business.
In the oil crisis of the 1970s, for example, major financial companies such as Penn Central and Franklin National went bust. The booming '80s saw hundreds of banks go belly up due to bad loans made to the farm sector and the Third World, and, later, S&L loans to U.S. homeowners.
The '90s? Remember the Long-Term Capital Management debacle in '98, following the Asia Crisis in '95 and coinciding with Russia's ruble meltdown? Then, too, we heard predictions that the world as we knew it was ending. It wasn't.
Yes, the problems to be worked out this time seem scarier than most. And watching institutions like Bear and Lehman fail, and Merrill Lynch taken over just like that, doesn't inspire confidence.
But they're no different from other investment firms of the past that have paid the price for making too many bad decisions or taking too many risks in what is already a high-risk business.
How long all this will last is anyone's guess. But this a big country, with a highly liquid market and a still-strong economy. We'll get through it.
We also see something of a silver lining in the decentralization of financial power. That power has always resided in New York City, where a herd mentality too often prevails. The piling of Wall Street firms into exotic mortgage investments is only the latest example.
New York is also full of brokers and analysts schooled in the investment theories of college professors, many of whom have never invested successfully.
Much of the nation's investment talent, however, can be found elsewhere -- not only in Boston, with its exemplary mutual-fund organizations, but also in places like Chicago, Dallas, Atlanta, Denver, San Francisco and Los Angeles.
In fact, some of the best money managers we know use Wall Street as a contrary indicator: Whatever it's doing, they do the opposite.
It's worth noting that Bank of America, the company that was called upon to bail out the troubled New York firms in this situation, is headquartered in Charlotte, N.C.
It's long been our contention that too much thinking is done for the country out of New York and Washington. (The same is true of the media business, which because of agenda-driven, East Coast biases no longer seems able to report what's really going on.)
Fortunately, America continues to be driven by inventors, innovators and entrepreneurs who will go on creating the products and services that keep the economy growing and people at work.
We trust that this reality -- along with the stewardship of experienced leaders such as Treasury Secretary Paulson and Fed chief Bernanke -- will in time lead to stabilization and recovery.
Good
Oil prices dropped to $93
- This will elevate the stress on inflation, allowing the FED and the US government to focus on combating the failing economy instead of trying to juggle both economy and inflation
Bank of America bought over Merrill Lynch- The merger will create a powerful synergy between US largest depositor bank and stock
broker. Merrill Lynch will have less problems with it's credit problems with Bank of America backing it up10 banks created a common fund of $70 billion
- This will create another layer of insurance on top of what the central bank and treasuries are offering. This can help banks smooth over any credit liquidity
Bad
Lehman brothers filing for bankruptcy
- Banks and financial institutions around the world who are have dealings with Lehman may be implicated and a chain effect may occur leading to the collapse of other financial institution. However, this is not very probable as the treasury department made it clear that it will not bail out lehman as they believe that it will not create a systematic collapse of the US financial system. There is still a small hope that a buyer may appear to bail lehman out.
AIG seeking more fundings and their ratings have been downgraded by SnP
- AIG invested too much of their funds into property and mortgage backed securities. With the declining prices of the real estate market, the value of these assets just keep falling. The treasury also indicated that they will not bail out AIG. The silver lining is that AIG still holds many profitable divisions and business which they use it as collaterals to raise up to 20 billion. Another possibility is the interest that soveriegn funds may take an interest in it given the strong pressence of AIG in many of these countries.
Bank of America bought over Merrill Lynch- Bank of America may not be too healthy in the future themselves as consumers credit cards and personal loans start to fail. They are still digesting their purchase of country wide, a mortgage financial company a few months ago. So with the purchase of Merill, they may expose themselves to more trouble in the future
The Strategy for Now
The market is grossly over sold. It is due for a technical rebound. Potential good news along the week is that the Fed may cut interest rates below 2% and provide more instruments to help banks cope with the crisis. Secondly, Goldman and Morgan Stanley, the only 2 survivors of the 5 investment banks, is due to report their 3Q report this week. If their report is positive, there may be hope that the Merrill and Lehman disaster are isolated cases due to bad investment decision made by them.
I will suggest that investor wait for the technical rebound and liquidate up to 50% of their holdings into cash. Most of the holdings are 30-50% in stable cash and bonds. I will move a portion into the equity everytime the market reaches a new low. Essentially, by the time the whole crisis is over, we will be able to average down quite a bit using this strategy. In this case, we can still maintain our long term strategy for our UT portfolio and at the same time, actively investing into the bottoms of the market.
Lastly, I like to share this article on Investor's Business Daily on why this is not the end of the world.
Investor's Business Daily
This Too Will PassMonday September 15, 6:53 pm ET Ibd
Wall Street: Old timers will recall F.I. DuPont or Goodbody & Co. Not-so-old timers remember E.F. Hutton and Kidder Peabody. Now we can add Bear Stearns and Lehman Bros. to the storied names that have fallen.
We drop these names (and we could have mentioned a hundred more) for two reasons: (1) to remind readers that this isn't the first time an investment bank or brokerage has gone under, and (2) to point out that the country has always survived and grown.
In fact, what's happening now is quite normal in a financial system characterized by booms that lead to excesses that then require corrections before any renewal takes place. We'd be hard-pressed to remember a bear market when one or more financial firms didn't go out of business.
In the oil crisis of the 1970s, for example, major financial companies such as Penn Central and Franklin National went bust. The booming '80s saw hundreds of banks go belly up due to bad loans made to the farm sector and the Third World, and, later, S&L loans to U.S. homeowners.
The '90s? Remember the Long-Term Capital Management debacle in '98, following the Asia Crisis in '95 and coinciding with Russia's ruble meltdown? Then, too, we heard predictions that the world as we knew it was ending. It wasn't.
Yes, the problems to be worked out this time seem scarier than most. And watching institutions like Bear and Lehman fail, and Merrill Lynch taken over just like that, doesn't inspire confidence.
But they're no different from other investment firms of the past that have paid the price for making too many bad decisions or taking too many risks in what is already a high-risk business.
How long all this will last is anyone's guess. But this a big country, with a highly liquid market and a still-strong economy. We'll get through it.
We also see something of a silver lining in the decentralization of financial power. That power has always resided in New York City, where a herd mentality too often prevails. The piling of Wall Street firms into exotic mortgage investments is only the latest example.
New York is also full of brokers and analysts schooled in the investment theories of college professors, many of whom have never invested successfully.
Much of the nation's investment talent, however, can be found elsewhere -- not only in Boston, with its exemplary mutual-fund organizations, but also in places like Chicago, Dallas, Atlanta, Denver, San Francisco and Los Angeles.
In fact, some of the best money managers we know use Wall Street as a contrary indicator: Whatever it's doing, they do the opposite.
It's worth noting that Bank of America, the company that was called upon to bail out the troubled New York firms in this situation, is headquartered in Charlotte, N.C.
It's long been our contention that too much thinking is done for the country out of New York and Washington. (The same is true of the media business, which because of agenda-driven, East Coast biases no longer seems able to report what's really going on.)
Fortunately, America continues to be driven by inventors, innovators and entrepreneurs who will go on creating the products and services that keep the economy growing and people at work.
We trust that this reality -- along with the stewardship of experienced leaders such as Treasury Secretary Paulson and Fed chief Bernanke -- will in time lead to stabilization and recovery.
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