Monday, September 15, 2008


The collapse of the big financial kings and broker-dealers continues. This morning, the London market is down 4% with the financial index down 7%. Futures indicate the DOW will open down about 325 points, the S&P down 44 and the NASDAQ down 50.

The bad news (as always) is accompanied with good news. The 10-year treasury is down to 3.5%, oil futures which have dropped $5 are trading around $96 per barrel and the Yen is soaring. Japan, with no domestic oil production, will be one of the big winners as the price of oil falls.


The short term focus is on problems produced in the past and already solved. The sub prime slime hit the leveraged mortgage holders hard, but the decline in bond rates is a bigger deal for long term profits than the bankruptcy of Lehman or the sale of Merrill. The Lehman and Merrill will get the press coverage in the short run.

Lehman has stood for 158 years and is at risk of liquidation. Merrill Lynch will lose its independence and become a subsidiary of BAC. Merrill is indicated at a $23 open, it closed at $17 on Friday. BAC is indicated at $29 after a close of $34 on Friday.

The 3.5% rate is the game changer. In just two months, the average thirty year mortgage rate fell from 6.5% to 5.8%. The spread between the 10-year Treasury and the 30 year mortgage rate is still high. There will be additional declines in mortgage rates. Within days, mortgage rates should be at or below 5.5%, near the lowest levels seen since the early 1960's or the late 1950's. Trillions of long dated assets will increase in value as rates fall. Houses and long term fixed or increasing cash flows are worth more today than they were yesterday. The cash flow produced by solid growth companies is becoming more valuable by the minute.

The knee-jerk response is going to take stock markets down. In the London market basic materials, energy, consumer cyclical and financial stocks are all down 5% or more. The jump in bond values is the immediate offset on the see-saw but all ongoing cash flows are worth more.

Central banks are already responding. A 70 Billion Dollar Credit Line has already been made available. China just reduced its lending rate and its reserve ratio. The 1% reduction in reserve requirements follows something like 9 increases over the past 18 months or so. After the reduction, the reserve ratio is still an incredible 16.5%. The brakes are still being applied. Over the weeks ahead, country after country will gradually release the economic brakes. Short rates and commodity rates take walks together.


The tango with Russia continues. The US has added ships in the Black Sea; Russia will hold joint maneuvers with Venezuela. A deal with Syria will establish the first Russian Naval base in the Caribbean.

Nicaragra is the only country besides Russia to recognize the breakaway regions from Georgia. Not even Cuba has taken the Russian side. Russia has recovered from its 1989 collapse but it is not the same bad boy as the Soviet Union. Still, Russia is showing the US and Europe that they can be active in the Caribbean and the Mediterranean if we want to be active in the Black Sea.

Secretary Gates is in Iraq. Iraq is ready to talk with the US and with Iran. It is time for a final compromise on the deployment of troops in Iraq. I believe the deployment of troops deal is the last significant problem that is holding up the deal with Iran.

The IAEA is ready to release a report on Nukes in Iran. Iran is applying pressure in hopes of receiving a clean report. The IAEA is expected to report that Iran is demonstrating that the refinement of uranium is for peaceful purposes. A good report could already be in the hands of Gates and a deal could occur at any moment.

Letters found on a dead al-Qaeda leader show the degree to which al-Qaeda in Iraq has fallen. The leaders have become paranoid. This is understandable because leader after leader, from Afghanistan, to Pakistan, to Iraq has been struck by Predator Missiles from nowhere. It has even been verified that actors are being used to portray al-Qaeda leaders in Internet videos!


Stock brokers are crying the blues. Many a career broker is out of a job. The rest are not sure which shoe will drop next. It is extremely hard for brokers to be optimistic in this environment. Their pessimism is apt to rub off on the few optimistic clients they have. We face a wonderful buying opportunity. Again, the talk will be all about the sale out of Merrill and the bankruptcy of Lehman. The jump in bond prices will be hardly noticed and the talk about the decline in the price of oil will be mostly about how it is happening as a result of the economic "recession or depression".


The Maple Springs United Methodist Men's Bible Study just had a great weekend at the beach. Six of us carried an ill man into the ocean to assist our pastor with his baptism. We enjoyed good food, fun, fellowship and spiritual guidance. I cannot report who won our poker tournament but it was not me. Wednesday we will start a 19 week video series on Acts. All are invited.