Saturday, October 11, 2008

G7....Stock Market.....and the Finacial Crisis.

Wow what a week. I have never seen volatility, driven by such fear and uncertainty as I have over the last couple of weeks. From my perspective the "market" is blaming the majority of the uncertainty on the Lehman failure. Any way you look at it the shareholder loses, but the fallout from Lehman bankruptcy is that financial institutions do not want to lend money to anyone who can fall into the same situation. Morgan Stanley, Merril Lynch, Wachovia etc etc etc. Why take the chance of lending money which you will never get back. Better to let it sit on your balance sheet and lend it back to the Fed overnight (at 0% in alot of cases)just in case the market begins to make a run on you.

As all the talking heads are saying, this crisis will stabilize once banks begin lending to each other in a meaningful and consistent way.

Yesterday a meeting of the G7 convened in Washington, the first statement came out as follows.

``The current situation calls for urgent and exceptional action,'' the finance ministers and central bankers said in a statement after talks in Washington yesterday. They pledged to ``take all necessary steps to unfreeze credit and money markets'' without detailing how that would be accomplished.

Notice the last line WITHOUT DETAILING HOW THAT WOULD BE ACCOMPLISHED. The market wants tangible solutions.

As Jeff Pantages, chief investment officer at Alaska Permanent Capital Management said

``They've seen what Lehman did and the repercussions, if you're a bondholder, you've got to feel better. If you're a shareholder, you're not so sure.''

This is what I said above, the government probably will not let another large institution file bankruptcy (see AIG, GM, Chrysler,Ford....)but will allow a takeover/merger at extremely low valuations causing great pain for the shareholder.

``We have taken a lot of actions,'' European Central Bank President Jean-Claude Trichet said. ``My experience of markets is that it always takes a little time to capture the elements,'' of the decisions taken, he said.

Paulson signaled his top priority is getting his plan to buy financial stocks running as soon as he can. ``This is a plan that I'm quite confident will work,'' he said. The Treasury chief also said ``we have more to do in the liquidity area.''

The American plan follows U.K. Prime Minister Gordon Brown's 50 billion pound ($87 billion) program that will partly nationalize at least eight

As for these statements I tend to agree with Trichet, there is no way the $700 billion Bailout program could be working already. The Treasury hasn't started an auction or bought one financial stock yet. But do you really want to be short Morgan Stanley at $3.00 a share when the Federal Government has a vested interest in is surviving? Not me.

Stocks recovered at the close yesterday to post moderate losses for the 8th straight day. Can we go lower, yes. Will we go lower, probably. But overall valuations for these companies are at all time lows. In any other situation these stocks are screaming buys (I am not suggesting anyone go out and buy)so eventually as market volatility lessens and banks begin lending stocks will move higher again.

Check back later as I am working on a post about my thoughts on a clearing house approach toward bank lending and updates from the G7 meeting.

Good Luck and Good Currency Trading.

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