Wow!

We knew it would be ugly and honestly for most of the day, I was surprised we weren’t down more.  Then, it deteriorated.  Down 500 points.  Also, our 3rd 90% downside volume day in the last couple of weeks.  Let’s revisit what bottoms look like.  I’ve mentioned that the ugliest days of a bear market come at the end.  Typically, you have several 90% down days like today and then poof, we start going up and having 90% up days almost back to back.  Also, the market turns when sellers are exhausted and prices are cheap enough to entice them.  We also see markets turn when nobody sees it coming.  Perhaps that’s soon.  Does anybody out there find any reasons for the market to rally?  I don’t. 

Let’s face it.  We have a weak economy that’s getting weaker.  We have unemployment rising.  We have lending standards going up and credit getting tighter.  Banks don’t want to lend, borrowers don’t want to borrow.  We have a global economy slowing and commodities coming down.  So, why would anybody on earth want to buy stocks?  Because, stocks are/will be cheap.  They will be a good deal.  Not necessarily tomorrow or next week, but eventually.  That’s the way markets work.  That’s the stock market.

I’ve been asked today by doctors, friends, family, clients, etc., what happened with Lehman Brothers.  Here’s the analogy I’ve given.  My son is 6 years old.  He probably has $25 to his name.  Let’s say he goes and is able to borrow a lot of money and lend it out to a whole bunch of people.  Those people go and buy homes.  By the way, the borrowers aren’t qualified to buy those homes.  Everything’s great for a while.  Prices of homes keeps going up, my son keeps borrowing and lending.  Meanwhile, he still is only worth $25.  Uh oh.  Home prices start falling.  People stop paying my son back.  He can’t pay back the people he borrowed the money from.  Poof, he declares bankruptcy.  The only difference is that you’re talking about billions of dollars, 25,000 employees, and a much longer process.  That was Lehman Brothers.  How does this affect you?  Many institutions own Lehman Brothers bonds.  Confidence disappears and lenders start calling the loans.  So, it’s a trickle effect.  Now, a company you do business with has a harder time getting financing.  So, maybe they raise prices.  Then, maybe you have trouble getting a loan even though your credit is good.  Not to mention your stocks go down.  It’s just not good.

The term “Black Sunday” will be used in the history books as the day the financial landscape in this country changed forever.  Do you remember where you were when the stock market crashed in 1987?  You’ll remember where you were when 2 (possibly 3) institutions left us forever.  So, who’s buying who?  Basically, banks are buying the investment banks.  JP Morgan bought Bear Stearns.  Bank of America bought Merrill Lynch.  The reason this is happnening is because by letting a bank buy you (assuming you’re Merrill Lynch), you now are part of a balance sheet that has a much easier time borrowing money from the Fed or Treasury.  The consolidation will continue for some time.

I’ve had a ton of e-mails today by many readers asking if this is the time to buy some financials.  For disclosure, I own Goldman Sachs, Citigroup, and I’m short the financials using the Ultrashort Financials ETF (SKF).  I’m not buying any financials right now.  Instead, I’m trying to build a financial structured note that protects my principal while still getting the upside.  I’m also looking at buying some investment grade and high yield bonds.  The fear is at an extremely high level right now.  So, that means great companies are having to pay higher interest rates for their bonds.  That’s where I’m spending my time.  I’m doing my homework in the bond market.  I think U.S. treasuries are a bubble that is not talked about.  Everyone was talking about commodities and whether they were a bubble.  But, money is flying into U.S. treasuries for safety reasons and that’s driving interest rates way way down.  A longer-term pairs trade would be to be short treasuries and long corporate bonds.  Needless to say, the Crazy Investor Indicator is at very very high levels.  So, we’re getting close.  I think perhaps a week of churning around and maybe going lower and I think we’ll put in a trading bottom.  Now, what I really want is not a trading bottom, but a real bottom.  Remember, if we see more panic followed pretty quickly (perhaps in the same day) by panic buying, that could be the real bottom.

The Fed and Treasury are doing the best job they can right now.  It obviously wasn’t fast enough.  But, they tried to engineer a sale of Lehman Brothers.  Things must have been really bad for nobody to step up and make that purchase.  I didn’t think they would cut rates anymore but the futures market is suggesting they will cut rates this week.  Perhaps a 1/2 point.  I think that’s the right move.  They can always take it back in a few months.  Right now, they need to restore confidence, keep money moving around, and let us know they are there for us.

It’s a tough market.  Do not try to pick the bottom.  I think the lesson here is diversification.  Stocks, bonds, cash, shorts, structured notes, private equity, real estate, & metals.  It all has a place in a portfolio. 

Have a good evening.  Go Cowboys!

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