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Future Profit in Current Panic


Buyers could be rewarded in years to come.


You'd best start believing in ghost stories…because you're in one!
- Pirates of the Caribbean

Is this capitulation? Believe it or not, I still didn't feel what purists probably wanted me to feel. I kept looking at the market yesterday and thinking of all the oversold stocks. I was thinking about how much money could be made once the dust settles.

Obviously, there were plenty of people who were afraid. Obviously, fear feeds on itself and can be - even more than love - irrational. It was a nightmare session.

We could be looking at a total revamp of our capitalistic system. That has me scared. A lot of what's going on is worrisome. The endgame has to be nasty, but it doesn't have to be the end: It could be the beginning. There will be a renewal of capitalism, albeit with more rules and regulations.

Blame Game

I'm going to get into this briefly because there is certainly enough blame to go around, and it's a game that often delays solutions.

Unfortunately this episode has become a political football when it could be a chance for Washington to shine. (I understand why Senator Obama is pouncing on the issue, particularly when Senator McCain and his team have been putting their feet in their collective mouths this week, but I would rather hear solutions from both sides.) Solutions aren't chasing the bad guys or making incompetence the same as nefariously crushing the economy. I hope Congress gets its act together.

Congress and everyone else on Capitol Hill looked the other way as US home ownership increased markedly, which meant that lending standards were decreasing, too. I believe the notion that everyone in the country was entitled to a home opened the door for the kind of miscues that are now sinking Wall Street. There is no doubt the political desire to make things "fair," or, in other words, the idea the government would fund everyone owning a home, created the atmosphere for complacency and greed on Wall Street. Main Street took advantage of this too, too, and it felt like everyone was getting what they wanted.

Congress pressured financial institutions into making loans to people on the margins. Fannie Mae (FNM) and Freddie Mac (FRE) lowered their standards and became a depository for Wall Street to make and dump high risk loans. So now we hear it's about higher lending standards and ironclad regulations. I don't think it's about regulations but enforcing standards already in place. It's about getting back to basics.

This is a situation, however, where I would blame Wall Street more than Congress but caution that more regulations could backfire with respect to the traditional role of Wall Street as the funding source of the nation's economy. Greater regulations after the Internet bubble popped haven't proven effective. Moreover, taking risks is part of achieving success.

The patient has almost killed himself: Let's hope the physician doesn't finish the job.

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By the way has anyone seen President Bush? This is beginning to feel like the aftermath of Hurricane Katrina. Also, the parts of the media that said Wall Street didn't reflect Main Street when the Dow was at a record high last year sound real phony to me with their crocodile tears about how much the average American is losing in the stock market these days.

The past two weeks have been quite the rollercoaster for the stock market. We have seen the government take stakes in the mortgage and insurance industries, while it let a 158-year-old investment bank fail. If the past year and a half has been any indication for history to repeat itself, one would think that we have not reached the end of the road. The entire financial system has been reworked over the past month, with questions remaining about the ability to survive of two of the remaining five investment banks driving the entre market off a cliff yesterday.

The question going into yesterday was whether Morgan Stanley (MS) and Goldman Sachs (GS) had a chance of surviving on their own in the new business climate. By the close the answer was an emphatic "no."

No matter how much panic there is in the market right now, we believe years from now those buyers of venerable assets like Merrill Lynch and even Countrywide Financial will look like pirates living off their accumulated buried treasures. In fact, I feel many will take to calling these windfalls "loot" rather than investment gains because of the inauspicious backdrop of runaway fear, rampant and (often) erroneous rumor mongering designed to create runs on banks and general business mismanagement. We are all paying a price but the biggest losers are walking the plank.

Prior to the 504 point drop earlier this week, July 15 had been the bottom for the market. The support followed the SEC's rule that limited short selling on 17 financial stocks and the mortgage giants Freddie Mac and Fannie Mae. That move added some stability to the market for a few weeks until the moratorium ended on August 12. August 13 was the beginning of the end for Fannie, Freddie, Lehman Brothers, and American International Group (AIG). Merrill Lynch sold itself just as a shadow of a neutron bomb could be seen and felt overheard, getting larger and larger. So now we have a race against the clock by a couple of the best run companies in America, in any industry.

I wonder if the Fed is reconsidering its decision not to cut rates on Tuesday. This is a global problem and central banks around the world are pumping in cash into the system at breakneck speed. At the end of the session, $3.6 trillion dollars have now been wiped out of the world's equity markets this week.

That shock to the system sent investors scrambling to gold which rocketed for its highest one-day gain ever. The three month Treasury Yield finished the session at 0.03. My goodness, that is definitely a flight to safety.

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