bank failure

Is the market going to crash? It already did, just not in one day, but it is not over yet. As of yesterday the Dow has lost 2,000 points this month which puts the US markets in “crash” territory. We expected another negative day, 8 straight days, but not a 7% decline in the Dow.

As of right now the overnight markets are getting hammered. Japan is down 9 – 10% plus, its 1 AM right now, so it is unclear where it will close. The other markets are also down China is off 4% and Australia is off 7%. European markets are indicating a steep selloff when they open. All of this points to the 9th straight negative day in the US markets, unprecedented in our lifetime.

Historically, after 5 or 7 days of steep selloffs there is a rally of 10% or so. This has failed to occur and yesterday we saw a 800 point reversal with the selling happening in the last 40 minutes of the trading day. This may indicate the beginning of the bottom, but that is unclear at the moment. Certainly this is no time to bargain hunt and prudence takes first priority.

We still favor a 40% + cash position, but selling now to raise cash is a fruitless endeavor as you suffered severe losses already. Do not try and pick the bottom as you will not find it right now. If the Dow crashes through 8300 it is possible, stressing possible, to see 7300 or lower near term.

This is not a problem you can just throw money at, we tried that already and it failed miserably. In our opinion bankruptcies need to happen and the Fed needs to let the market go, it is the first step to recovery. Unfortunately, they will not let that happen.

We suspect that the Fed will cut interest rates by at least another .50% to a full 1%. We will see a FDIC brokered bank deal in the morning and an accelerated cash injection into the banking system, the Fed buying preferred stock, in the next few days. Unfortunately this will not work.

The problem is not sub-prime, that was just the catalyst, the problem is derivatives, which is a $560 TRILLION market, is that half a google? Combined with hedge funds unwinding $2 trillion in trades or a portion thereof. All of this equals severe problems for the US markets, especially with a 3 day bank holiday. Not only do we favor high cash positions, but we also favor cash under the mattress, yes it could be that bad.

Who is to blame? Easy, all the Politian’s that we re-elect all the time. All those who voted for the repeal of Glass-Steagall need to go, preferably indicted, as that is the major reason we have this issue right now. Greenspan should be drawn and quartered considering he resisted regulating the derivatives market and support the Glass-Steagall repeal. I know it is I am speaking blasphemy for blaming Greenspan, but the guy caused all of this with loose credit and monetary policy with a flare for no regulation on the banks…nice move.

Hindsight is 20/20, but it was just as obvious then as it is now that these moves were bad news. It is possible to see a 10% decline tomorrow, but we also see the possibility of a relief rally. It is a 60/40 split right now favoring a decline given the selling pressure and mounting losses for investors.

Potential possibilities are National City is sold tonight, maybe Sovereign bank as well. A interest rate cut and more cash infusions into the banking/commercial paper system. We may see the nationalization of the banking system in the near future, a good move? We think no for the long-term, but right now it would stabilize the markets. Cash remains king.

We wish the best to everyone and are hoping for the best.

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