Thoughts on Markets

Monday, September 15, 2008

The Financial Industry is Crashing and Taking Markets With It


Both silver and gold performed well today. However, both are off a bit overnight. The mining stocks were mixed, but began to take hits as the DJI plunged down 500+. That sizable drop put a drain on the whole stock market. The culprit is below.
The XLF graph reveals the sector which was impacted. The collapse of Lehman and the pending collapse of others in the financial sector are dragging the market down now. We will see much more of the same in the future.

From Martin Weisman

"Here's What's Happening and
What We See Coming Next ...

The financial failures you've seen so far are just the tip of the iceberg ...

  • Lehman Brothers is merely the first to fail. Expect more in the weeks ahead, possibly starting with those that have the smallest capital cushion.

  • Bank of America is making a horrendous mistake. It's already bogged down with its earlier purchase of Countrywide Financial, a classic pig in the poke. Now, on top of that bad move, it's taking on all the debts and risks of Merrill Lynch.

  • AIG, the biggest insurance firm in the country, is desperately trying to shore up its balance sheet after suffering $18.5 billion in losses over the past three quarters. It's planning to dump assets, raise capital, and asking the Federal Reserve for a $40 billion bridge loan. Don't be surprised if AIG is taken over by insurance regulators in the days ahead. And don't be shocked if more insurance company failures follow.

  • Look out for bigger financial troubles in the banking industry, including not only the names that are in the news, like Washington Mutual and Wachovia, but also at Citicorp, HSBC ... and yes ... Bank of America."
These are the financial giants which profited handsomely during the mortgage binge from sub prime lending to sub standard borrowers who were unable to service the fancy financing. These companies acted irrationally, because they believed that they would always be able to get bail out funds from Uncle Sugar or the Federal Reserve. All thought they were too big to be allowed to fail. I wonder if the CEOs will be rewarded for their foolishness with big severance benefits, as were those of Freddie and Fanny. It is likely! It would be much better to charge them with negligence at the least and put them in prison for acting without considering the risk to shareholders and the entire financial system. This sure seems like criminal activity to me!

How many more will fall? There are some 117 banks on the troubled list now. If you are a risk taker, buying puts on some of the suspects or the XLF seem rational at this point in time. Take a look at the October and December puts on them. Put options are less risk than shorting the stocks, because you know exactly what your risk is whereas in shorts you have virtually unlimited risk. The cost of the puts is the only monetary risk you take with the puts.

The precious metals are a true long term safe haven as they have been for centuries. The paper currencies are getting riskier every day. There could be a major default on some of the currencies.

We must always remind ourselves that this is a temporal and will pass away. Only the eternal life is the safest security. This is available only through Jesus Christ our Lord. No many comes to God, the Father except through Jesus Christ. We must daily thank Him, obey Him, give Him the glory, and enjoy the peace He provides His people in the midst of storms of any type.

Best to each, Doug

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