Monday, September 22, 2008

Stay on the Sidelines

Good Morning Everyone!

A little commentary this morning. There are times in the market where you need to just sit on your hands and watch. Now is certainly one of those times.

There are simply too many unknowns out there. The time to trade and invest will be after we get a good look at the Treasury crisis bill. This legislation will decide the fate of our entire financial system. Like President Bush said this morning "The whole world is watching".

Making trades before this bill is announced is pure gambling in my opinion. Stocks have drifted lower in early trading as traders try to digest all of the news from over the weekend.

The early reaction to the news of the bailout has weakened the dollar and given a lift to commodities. Gold has made a big move this morning. Its up around $30. its difficult to trade these knee jerk reactions long term because we simply don't know what the Treasury bill will look like.

The knee jerk reactions that we are seeing are predictable reactions to a huge bailout: A weaker currency which in turn helps put a bottom in on commodities.

There is news out on Goldman and Merrill. This marks the end of an era folks:

"Sept. 22 (Bloomberg) -- The Wall Street that shaped the financial world for two decades ended last night, when Goldman Sachs Group Inc. and Morgan Stanley concluded there is no future in remaining investment banks now that investors have determined the model is broken.

The Federal Reserve's approval of their bid to become banks ends the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and caps weeks of chaos that sent Lehman Brothers Holdings Inc. into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America."

Its kind of amazing isn't it? The investment banks are all gone. I bet many Harvard business majors are changing their major today. Who wants to go work for a bank and make a bank teller salary? Wall St. will never be the same in my view. The days of big money on the street are temporarily gone.

Conversation with a Wall St. banker

I spoke to a banking source last evening on the bailout and asked him his thoughts. His comment to me was "they better get this right". He also explained that he needs to see the details before he can really make a call on whether or not this fix will be adequate.

The one way this could work in his opinion is if the bad assets on the books were able to be bought by the Treasury at distressed prices. Lets say .30 on the dollar.

The new lender would then have a lot of room to deal with homeowners carrying mortgages. He gave me an example:

Homeowner bought a house for $600,000 and its now worth $300,000. If the new lender has the loan from the government at .30-.40 on the dollar, he could afford to redo the mortgage at $300,000 and give the homeowner the option of staying in the home at a 50% discount. Many would jump all over this in my opinion.

This banker also believed that Wall St. would run circles around the government workers who would be in charge of selling these distressed assets that Paulson buys.

His quote "When you match an experienced investment banker with a government 9-5er who makes $90k a year on his government salary, the banker is going to going to win that battle every time. It wouldn't even be close". This to me means the taxpayer loses big if Paulson is able to get these bad loans from the banks.

The Wall St. pigs will razzle dazzle the government worker, and buy the assets for a much lower price than the government could have gotten. Wall St. will then turn around and make a fortune. This is what happened in 1990 with the last trust according to this source.

Now, he also said that he doesn't see how the banks would ever let Paulson have the bad loans at .30 on the dollar because it would wipe most of them out. He needed more details on what Paulson plans to do and what he can buy the asssets for before he could comment further as to whether or not this can work.

Bottom Line:

In my opinion, its all going to come down to whether or not Paulson can talk the banks into dumping their bad assets at a cheap enough price. I expect a lot of wheeling and dealing between Paulson and Wall St. Paulson I would assume would offer many incentives that would entice the banks to dump the assets at distressed prices.

Some of the incentives could include a Treasury backing that guarantees their survival, and promises to merge others into banks in with other institutions which would keep them out of BK.

Of course, this is all speculation on my part and we need to see what happens.

My only hope here is that the banks have a "come to Jesus" moment, and agree to dump these assets at the prices the Treasury needs to make this work. They must realize that our financial system hangs in the balance.

Even if this all comes into place, I am not sure its enough to get us out of this mess. The banker I spoke with also agreed. There are consequences to taking such drastic measures. Some of the risks included foreign nations bailing on our treasuries, a crashing currency, and soaring inflation.

Lets see how this all plays out. I am very very skeptical, and it looks like Wall St. is as well. The DOW now sits down 156 points.


opportunistic said...

I guess that the $2 trillion dollar question is, what will Henry P. pay for the assets?

I think, until we know that variable, it is difficult to judge this plan.

Jeff said...



What a day today. If the dollar goes down the toilet like it did today we are in deep trouble.

Lets see what this plan looks like when its finished. Oil jumping $20 was a very ominous sign regarding our currency.

opportunistic said...

I think I'll dabble in the currency a bit. I found some ETF's that have a .4% expense ratio, but they pay interest. I'm looking at capital preservation rather than making money so I'm not turned off by the load. The question remains, which currency(s)?

Jeff said...

Short the dollar because I think this bailout is going through.

Gotta be careful though. Especially if you use leverage.