Reality Slaps Wall St. in the Face

Good Evening Everyone!

What a day today. Stocks tumbled today as fear and uncertainty continue to send shivers down the spines of Wall St. traders. The DOW and Nasdaq both tumbled giving back all of Fridays gains.

The bailout is already affecting the markets and it hasn't even been passed yet! It appears that there is no way to stop the passage of this bill. We are already seeing the consequences of such a costly bailout. One of my biggest concerns regarding this bailout is the effect it will have on the US dollar.

It didn't take long to see what the world thought of our bailout. The dollar plunged, sending commodities through the roof. Oil rose a record $20 to an intraday high of $120 barrell before pulling back to $115 at the close.

As for the dollar, a picture speaks a thousand words:

My Take:

As you can see, the dollar plunged today as traders anxiously wait for the details of the bailout. I can only imagine what the dollar will look like after the bailout gets approved. This is what happens when you are about to add a trillion dollars to our national debt.

Bailout Update

It appears Wall St. is getting increasingly concerned that the bailout won't as friendly towards them as first thought. The Democrats seem to be pushing for drastic regulation over Wall St, and a drastic reduction in CEO compensation.

Here is the latest on the bailout:

"APCongress,

Bush team OK bailout terms;

Stocks sink

Monday September 22, 6:00 pm ET By Julie Hirschfeld Davis
Bush administration accepts some of Dems' demands in bailout bill; Stocks plunge, oilsoars
WASHINGTON (AP) -- Scrambling for a quick accord on the $700 billion bailout, the Bush administration and leading lawmakers have agreed to include mortgage aid and strong congressional oversight along with unprecedented help for failing financial institutions, a key lawmaker said Monday.

Unimpressed, investors sent stocks plummeting anew, pushed oil up $16 a barrel and propelled gold prices ever higher as they searched for a safe place to park their money.

Under other additions the Democrats are asking to the administration package, according to a draft of the plan obtained by The Associated Press:

-- Judges could rewrite mortgages to lower bankrupt homeowners' monthly payments.

-- Companies that unloaded their bad assets on the government in the massive rescue would have to limit their executives' pay packages and agree to revoke any bonuses awarded based on bogus claims.

The proposal by Sen. Chris Dodd, D-Conn., the Banking Committee chairman, would give the government broad power to buy up virtually any kind of bad asset -- including credit card debt or car loans -- from any financial institution in the U.S. or abroad in order to stabilize markets.

But it would end the program at the end of next year, instead of creating the two-year initiative that the Bush administration has sought. And it would add layers of oversight, including an emergency board to keep an eye on the program with two congressional appointees, and a special inspector general appointed by the president.

The plan also would require that the government get shares in the troubled companies helped by the rescue.

Wall Street didn't seem comforted. The Dow Jones industrials were down nearly 400 points near the end of the trading day.

Investors were uncertain just how successful the administration's plan will be in unfreezing credit markets, which many businesses depend on to fund day-to-day operations, and for propping up the still-weak housing market."

Final Take:

What hit the markets today was the reality of deleveraging. The days of making big money via leverage are now over. Goldman Sachs and Morgan Stanley are now just banks folks.

This new reality forces the pigmen to be leveraged less than 20-1 on each dollar of capital versus the 30-1 or higher leverage they have been using the past several years. This is going to kill their earnings power, and their stock prices will now be forced to reflect this.

Folks, this leverage isn't just a banking problem. If they can't lend at 30-1 on capital, there will be much less money in the economy. The investment banks essentially were the capital markets on Wall St. If you wanted to raise large amounts of money to buy anything in any area of the economy, this is where you went to get financing.

This vehicle of borrowing big money is now essentially gone. Because the investment banks now must lend using lower leverage, the value of all assets will fall dramitically because there simply won't be near as much money available for lending!

In this new lending environmnet, how are overpriced assets like 700k McMansions ever going to keep their value? The answer is they can't.

This is why you saw the home builders get creamed today.

The Housing Time Bomb Warning!

Now is nowhere near the time to buy a house. Please please please wait until the smoke clears before even looking. Don't get sucked into believeing that prices are down and you its time to start shopping. This may be the case in a few selective areas in parts of Florida, inland California, and the rustbelt where prices are down 50%.

Please wait to buy if you live anywhere else.

Bottom Line:

Our over leveraged ponzi finance system has come to a complete halt. Wall St. is now shivering at the thought of a bailout versus cheering for one. I think this may end up being more of a "bend over" for Wall St. rather than a "bailout".

Stock prices have nowhere near priced in the reality of a lower leveraged economy. Earnings will drop dramatically in most sectors because there is going to be much less money in the system.

This new reality has not yet been priced into equities.