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Monthly Archives: September 2008

Market Letter

At the risk of offering too many communications, I want to keep you informed during these very turbulent weeks. Last Thursday night, Washington Mutual failed.  Despite this being, by far, the largest U.S. bank failure, JPMorgan Chase took over their operations, assets and deposits immediately and with surprising smoothness.  Depositors and customers should be fine.  However, Washington Mutual equity holders were wiped out, and debt holders will likely get little return of their investment.  Today, the FDIC announced that Citigroup was immediately taking over the commercial and investment banking operations of Wachovia in a complex transaction.  The FDIC, our federal bank deposit insurer, did not lose money in the Washington Mutual transaction, and may not lose money in the Wachovia transaction.  I think the FDIC has been doing a great job of handling these momentous events smoothly. Those little placards on bank counters really do have a great federal agency behind them!


Lincoln Anderson Update

Financial markets have been on a long and winding road of turmoil and trouble, and it is not over, though we may, and I emphasize may, have seen the bottom in the stock market.  The turmoil over the last few weeks has been incredible.  Financial firms that were viewed as very market savvy with good risk controls have turned out to have highly levered portfolios invested in a very poor choice of securities.  And we have seen some of these firms go under—Bear Stearns and Lehman Brothers—and effective government takeovers of Fannie Mae, Freddie Mac and the insurance company AIG.  Merrill Lynch announced that it would be purchased by Bank of America, in part to gain a stable source of funding. 


Will Last Week’s Financial Market Turmoil Spillover into the Real Economy?

"Last week a series of heretofore impossible events become reality. In the wake of the bankruptcy of one of the few remaining independent investment banking firms on Wall Street, and the purchase of a second big Wall Street investment bank by the nation’s largest commercial bank, banks worldwide ceased to trust each other. As a result, by the middle of the week, the remaining independent investment banking firms on the Street were actively seeking partners, global liquidity dried up, which, in turn, drove the yield on the three-month t-bill to as low as 0.3% (that is not a misprint!!). That is the lowest that it’s been since the Great Depression of the 1930s, as financial insititutions hoarded cash to ride out the storm. It was all-out panic. Pure fear gripped the markets. The question everyone was asking was: When will markets recover , and what will stop the relentless and historic selling?"

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Will it Work?

If the markets hate one thing above all else it is uncertainty. The shift from uncertainty to clarity has most often marked the turning point for markets. For markets, what matters most isn’t about getting "out of the woods"; it’s about knowing how big the forest is. The market rebounds during the 30 days that followed on the heels of the mid-March Bear Sterns collapse and the mid-July government sponsored enterprise (GSE) bailout plan were the result of clarity. These catalyzing events cut through the cloud that had enveloped the markets as myriad potential courses of action and related fallout were the subject of wide ranging speculationl. In fact, the mid-July GSE event was so pivotal that even at the apex of last week’s sell off the financial sector remained above the low point reached in July that preceded the announcement of the Treasury’s plan to the companies into conservatorship. Last week’s announcement that the government will create a TARP to lift out the illiquid assets from the balance sheets of financial insitutions catalyzed on 11% rebound in the S & P 500 from the intraday lows on Thursday, as it provided the clarity necessary to stabilize the financial markets".

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The Financial Crisis Takes an Unwelcome Turn

"The erosion of value of some of the largest U.S. financial institutions came to a head this weekend as Lehman Brothers failed to find a buyer, Merrill Lynch entered into a deal to sell itself to Bank of America, AIG announced plans for a restructuring. This weekend was widely anticipated by market participants to result in the sale of Lehman Brothers and the coming week is scheduled to include quarterly earnings reports from Goldman Sachs and Morgan Stanley, and meeting of the Federal Reserve Open Market Committee. Ahead of all this, S & P 500 financial sector closed last week 23% above the mid-July low with only a few troubled companies trading at or near lows. However, the weekend events were disappointing for investors. Most importantly, Lehman Brothers failed to find a buyer forcing a bankruptcy filing and the Treasury made it clear that it would not guarantee any losses as it had during the Bear Sterns sale".

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Lincoln Anderson Update

The events of this last weekend represent a major step towards resolution of the financial market crisis. Another big investment bank, Lehman Brothers, failed. Also, Merrill Lynch agreed to be acquired by Bank of America.  This comes on the heels of the failures of Fannie Mae and Freddie Mac. And it is by no means clear that the bad news and instability of financial institutions is over. In my view the problems are not due to widespread instability in the credit markets. Broad bond market indices are mostly in positive territory. The problems are twofold: 1) high leverage at these financial institutions that have failed and 2) heavy exposure to subsections of the credit market are not doing well (subprime mortgage backed securities and the like). So I think these problems are not due to broad securities markets difficulties but rather, due to very high leverage investments in risky debt at some very prominent financial institutions that should have known better.


Weak August Retail Sales Means Near Zero Growth in Q3 2008

"The past week began with yet another U.S. government led rescue of a major U.S. financial institution – this time it was actually two rescues, Freddie Mac and Fannie Mae – and ended with talk of yet another U.S. government "encouraged" rescue of a major Wall Street investment banking concern. These events – once thought unthinkable and now almost commonplace- overshadowed the economic data released, which is all but confirmed that third quarter economic growth in the United States will be close to zero and that inflation likely peaked for the cycle in July or August 2008".

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Dont Blame the U.S.

"Over the past week, global equity markets have swooned, while government bond yields dropped and credit spreads widened. Why? Well, from our perspective, the market downdraft should not have been related to any change in the near term outlook for the U.S. economy. The U.S. economic data released over the past week was essentially just more of the same. The data, which included the vehicle sales, same store retail sales, manufacturing ISM, non manufacturing ISM and emplyment data for August, still suggest to us that the U.S. economy remains mired in a slow-growth environment along with sluggish job growth, and uncomfortably high-but about to recede-inflation readings".

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From Labor Day Slump to Election Day Jump?

"After starting the week near the high end of the range of the last couple of months, last week’s decline pulled the S&P 500 back to within 3% of the low for the year. Rather than reacting to the events and data of the week, we believe the market was pricing in the uncertainty surrounding the potential for negative news from the events and data to come over the next several weeks. The pending government takeover of Fannie Mae and Freddie Mac that took place over the weekend resolved much of the uncertainty as to the potentially negative impact on banks holding the preferred stock. Other news and events over the next few weeks include . . . . . . . . . . ."

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Market Update Letter

Along with the end of this summer, the markets also are poised to enter a new season.  The three months ended August 31 were pretty tough for financial markets, driven by continuing effects from the meltdown in the Financial sector, high energy prices and fears of recession. So far in September it has been more of the same, with the stock market down and economic indicators mixed—employment down, consumers cutting back, but factory orders and shipments strong.