Monday, September 15, 2008

The Shoe Drops

Says a friend of mine

We all went to bed last Friday waiting for the "shoe to drop"...the DOW had closed at 11421.99 (-11.72) as traders "waited" on news...and then the shoe did drop! aulson walked away from the "bailout" table (thank God!), Banks met and came up with a $70BB "liquidity pool" for financial institutions (far short!), Lehman declared bankruptcy (Chapter 11), and BofA "bought" Merrill Lynch for $50BB ($29/sh...a far cry from $98 it fetched last summer)...and this morning everybody waits on a restructuring of AIG...and WAMU...and WACHOVIA...and ???.

Each of these events singularly can be classified as a "major impact"...together they can be classified as "a major seismic shift". For sure we are looking at an economic recession and higher unemployment in the making. Where are we, and where are we going? For starters, let's step back and remind ourselves we are looking a a trillion dollar housing/mortgage deflation, with only 60% known so far. We also know the FDIC has categorized 117 banks as "problem" with only six of the actually failing to date. Give or take, it does not take much extrapolation to realize we have not reached a "bottom" and equity markets will continue to trend lower...and now that the U.S Treasury has called "uncle" to further writedowns, we expect other private firms will follow and a consolidation in the financial sector to take urgency...BUT I DON'T THINK IT'S A GLOBAL SYSTEMIC FAILURE! There is on going concern as the derivative positions held by Lehman are "un-wound" and who picks up the tab on accrued losses. This will continue to add pressure to the financial sector in weeks ahead.

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