Wall Street Gone?

I had lunch today with a friend of mine, and he asked me whether I thought Wall Street was gone as we know it. My immediate response was a resounding “Yes” because all of the tier 1 investment banks cease to exist (Merrill sold, Lehman bankrupt, and Morgan and Goldman are now deposit holding banks).

But, then I thought what about the hedge funds and private equity firms? They must be loving this environment because, for the near term, their main competitor is the government since the government is now back stopping the major banks. So, you have an unregulated (or less regulated) entity (PE and hedge funds) competing against a regulated and risk averse entity (government). I even heard that some of the larger PE funds are setting up in-house syndicate desks. Rather than go through an i-bank for an IPO, for example, why not have the capabilities to do it themselves? So, they are in fact morphing into investment banks. So, I do think that Wall Street will return and redefine itself as it’s been so adept at doing throughout the years.

Now, could this environment repeat itself in the future? You certainly hope not, but I think it will because the US government has socialized the losses (invest in thousands of banks according to Paulson…more like nationalize) and refused to allow capitalism to take hold. So, rather than let the crooks fail, we have decided to back stop them and keep them afloat. Remember, economic cycles are a must in a true capitalistic and free market society. There must be down cycles where people and firms trim the fat, ride out the tough times, and then be positioned to prosper during the up cycles. Isn’t that what all of us as individuals are doing right now? That’s surely why I have decided to write this market/investment blog. There are times when businesses that survive on credit cards should be allowed to fail. In the end, since we are not changing behavior, we will more than likely have a repeat. It’s sad but it’s been proven so throughout history…if you don’t learn from and correct your mistakes, you are doomed to repeat them.

Regards,
Moolah

It’s Hammer Time! Looks Like Another Day Of Gains…

After 2 years of a supposed strong dollar policy, where the USD lost around 16% of its value, Hank “The Hammer” Paulson has tried everything and anything (ask for $700 billion, stuck a bazooka in his pocket but didn’t use it, ban short sellers only to see the stock market tank further, and now nationalize the banks) to no avail. I guess we need something a bit more precise than a Hammer from the tool shed.

Initially, the US government wanted to start a bailout fund to buy bad assets…an obvious poor use of taxpayers’ dollars. Now, they are taking a cue from their British counterparts to instead buy equity stakes in banks. Regarding the UK plan, UK Prime Minister Gordon Brown was even nice enough to say, “This is not the American plan. The American plan is to buy up these bad assets by a state fund. We know that the taxpayers’ interest has got to be protected at all times, and that is why we are ensuring that it is an investment stake in the banks. We are not just simply giving money.” Does that mean we have run out of ideas and will now be following the leads of others? Or, as the saying goes, “Let’s keep throwing *&$% at the wall because something is sure to stick.”

As I am writing this, the Dow is up about 1% and Europe, except for Belgium due to BNP snapping up most of Fortis’ Belgian and Luxembourg assets, is up across the board. It looks like everyone got tired of blaming the US and decided to cheer any sort of action. Honestly, I really had no idea how vulnerable the rest of the world was until recently with the bankruptcy of Iceland (check out the article on Iceland below) and the roll out of bailout packages from across Europe. Also, not sure if you heard but there is news that Dubai may have to get a loan from Abu Dhabi. Wow…could Dubai be all smoke and mirrors? It does seem difficult to populate a Manhattan-sized city from scratch.

With regards to investing, I recommend you monetize your gains as we have days like yesterday. Don’t give up your gains in the name of greed because our economy is still in midst of a recession. People have short memories and tend to forget that with a day like yesterday…they want more. Yesterday, Bill Gates said that unemployment could reach 9% over the next few years! Also, capital is being taken out of market as hedge funds such as SAC Capital and Paulson have parked around $6 billion in cash or cash equivalents. Continue monetizing your gains, build up cash, buy some precious metals, and acquire stock in companies that can withstand economic downturns such as WMT, MCD, JNJ, KO, and MO, and you should be positioned nicely once the dust settles and volatility subsides. If you decide to buy stock, I would wait for a dip due to yesterday’s massive upswing.

Here are some articles for you to read:

- This one is from Iceland where foreign exchange is hard to come by since their banks went under. There’s a run on all things imported. Soon, like Zimbabwe, the supermarket shelves will be bare. This is just the first country of many, I think, that will experience this as time marches on. The Bloomberg story is entitled “Icelandic Shoppers Splurge as Currency Woes Reduce Food Imports” and the link is here.
- This one is from silver analyst Ted Butler. The article is entitled “The Masters of Destruction” as he feels gold and silver should be much much higher due to recent events (printing presses going wild, banks being nationalized, downturn in the global equities markets, etc.) but isn’t all for the benefit of the 2 or 3 U.S. bullion banks. The link to the article is here.

Thank you for all of your comments to date and those of you that have signed up for the free e-mail subscription as I will continue do my best to provide you with market information and advice based on how I see it and what I am doing with my own capital.

Ciao,
Moolah