What a weekend…the Cowboys and the Florida Gators both lose, but at least the Kentucky Wildcats won! Also, the Republicans finally stop fighting so a plan can be approved and Wachovia goes to Citigroup. Well, I guess Vikram Pandit has placed his stamp on Citigroup. Looks like JP Morgan must be in a better position than Citigroup since JP Morgan was able to cherry pick the good assets from WaMu, which wasn’t the case with Citigroup since they will do an immediate writedown of around $42 billion and provide warrants of around $12 billion to the FDIC for taking on part of the risk of Wachovia’s mortgages. There was a lot of talk also about National City on CNBC this morning. I hope that’s all it was…just a lot of talk since not sure how many more hits the financial markets can keep taking.
So, what do I think this all means for us? Personally, I think we are damned if the plan goes through and damned if the plan does not go through. Why? Honestly, I wish I could be more positive, but I would rather relay my thoughts and ideas to you in a truthful fashion. If it does go through, the markets should spike up in the short term but by turning the printing presses on, the dollar as we know it will continue to downward spiral. That should be positive for those holding gold bullion and gold stocks. Silver should follow. The largest silver-backed ETF, SLV, rose to a record 6,901.41 tonnes on 9/25/08. Also, the Treasury has announced that they are “temporarily” halting production for gold buffalo coins. They said they can’t keep up with demand as their price books show the coins selling for $1,100/oz. As I am writing this, gold is up $19 to $901/oz. Now, if the bailout plan does not pass, then the markets will inevitably tank because there will be more blood on the street and ultimately nothing to suppress the negative pressure on home prices. The government would essentially be saying that they will let the free markets work and let the firms fail regardless of the systemic risk at hand. However, with all of the government intervention to date (Bear, Merrill, AIG, WaMu, and Wachovia) and all the flack that they have taken globally by letting Lehman fail, my guess is that the bailout plan will pass. However, there are a group of conservatives in the House that will vote against it. If it passes, according to CNBC, the approval would result in $350 billion initially and then another $350 billion, which would be subjected to additional approval, at a later date. I assume the government would get an ownership stake (warrants, direct equity) in the banks that choose to sell their crap to them.
Everything the government has done to date has been in the name of limiting systemic risk to the global markets and to reinvigorate the credit markets so lending would resume. This hasn’t worked thus far. What happens if the banks sell their crap to the government and then resume sitting on the sidelines, refusing to lend as they could enjoy being in a more capitalized position? That would be another goose egg for the government.
The few people I have spoken to on the trading side are all scared due to the uncertainty in the markets. As I said before, monetizing your gains in the stock market is a must to improve your cash position. Also, the areas I think will be profitable during these times are precious metals and companies that sell products you buy regardless of the market conditions (fast and cheap food, booze, tobacco, possibly porn, etc.).
Enjoy your Monday and have a good start to the week…
Until later,
Moolah
