Sunday, September 21, 2008

Last week's markets......

So last week the stock market declined to new 52 week lows, only to soar again after the U.S. Government promised to bail out everyone with a "package/plan" estimated to cost U.S. taxpayers $700 million to $1 billion. The "cost" is tough to estimate as it will be determined years from now when profits/gains from the plan are determined. The downside of not doing something is that the U.S. stock market will probably drop in value somewhere in the TRILLIONS :) What remains to be seen is what impact this will have on the U.S. dollar, which has appreciated quite a bit over the last 2 months, recovering 1/2 of its declines vs. other currencies over the last 1.5 years.

So lets review the drama:

1) Fannie / Freddie get taken over by the U.S. government (after global monetary advisors were threatening to pull out billions of $$$ from the U.S. market. This effectively wiped out their shareholders and a U.S. Government advisor will now run the company.....

2) Merrill Lynch agreed to be bought by Bank of America for $44 to $50 billion. ML shareholders haven't approved the deal but they should agree to do the deal. This will put together the biggest retail broker company with the biggest bank distribution and the biggest mortgage company in the U.S. Oh yeah, and they are #2 or #3 in credit cards as well......The combined business will be ENORMOUS with some serious cross-selling capabilities. I have no doubt that the Merrill Lynch name will stay after the merger as it has SERIOUS brand equity. It will be Merrill Lynch, a Bank of America company.

3) WAMU - nobody loves them. Their deposits will keep them afloat for the immediate future but, if their losses in CA/FL continue to increase, they could end up going BK due having ZERO equity or via falling below federal government threshhold's for banks. Everyone watches eagerly to see if account holders begin to take deposits out of the bank and move them to other banks.

4) AIG apparently had assets but they weren't liquid assets and their business model needs liquidity/access to capital. When short-term funding market seized up it forced them to have some serious problems. The government apparently gave them a bridge loan, taking an 80% equity stake in the company. AIG, from what everyone seems to be saying, might be viable; it will just take a few months/up to a year for assets to be sold to pay down the bridge loan. When everything is said and done AIG will be a shell of what it is today but people might actually be able to figure out how the company really makes $$$ and how to assess the companies value by looking at debt vs. assets, which seemed to be why most analysts missed downgrading the company way before it ran into problems.

5) Goldman Sachs / Morgan Stanley - As of today I hear they are likely bank holding companies

6) Finally, Jim Cramer on CNBC was telling folks to sell up to 20% of their assets based on the stock market's recovery on Thursday/Friday. He seems to think that these rallies should be sold into and that the market turbulence will continue for some time.

Dan Ross

Alt ED: 9-22-08 - Market down 375 and the U.S. dollar falling leads to soaring commodity prices. Oil spiked as much as $25 today alone. Can anyone say inflation? Here we go again....another shock to the system....

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