Tuesday, September 30, 2008

A few words

I received an email this morning from a trusted financial planner here in Asheville. It sums up the current financial climate perfectly:

"How much more news can we stand?

Wall St. met Washington St. today in an historic clash that will be documented and debated for years. What seemed to be a timely, yet emergency situation, The House of Representatives chaotically and in front of the entire student body wet their pants.
I am not passing judgment on the passage or non passage of the House Bill titled, “Emergency Economic Stabilization Act of 2008”, I am referring to the process.

To get into the what, when, why and how this entire situation came about would take much longer than you want to read. Yet there are a few important items that need to be highlighted so we can move on into tomorrow.

1. Credit markets are locked.
You have heard me talk about this before. The inability for banks, insurance companies, securities owners, corporations of any kind, to loan money or trade existing assets is non existent. This is bad because the “float” that most businesses in America operate on has been restricted so much so that as receivables get pushed out past 30 days to 45, or 60 days, the “float” (excess money to pay operating costs, like payroll, power bills, taxes) goes away and businesses borrow money in very short term loans… one day to 10 days. This credit is now gone because banks are holding securities that they usually would sell for cash to make these loans but can’t due to no money available to purchase or sell securities.

2. The markets are spooked.
At the end of 2006 financial stocks represented about 27% of the Dow Jones Industrial Average. The idea that these businesses operate using money as their natural resource is not novel, yet when money is not available, they have nothing to make transactions with. Imagine Progress Energy without electricity, or McDonald’s without beef, or Disney without animation… a steady, affordable supply of money keeps banks in business. So the markets are screaming, “Without money, we have no transactions, no matter what the value of things are, therefore we will sell everything we can, and create cash any way we can… even though we are taking big losses.” Until money comes back into the markets, share prices are going lower.

3. Bank consolidation.
Banks are being forced to merge due to points 1 and 2 plus several other factors. The past 5 years have been wildly optimistic regarding construction and development, and the optimism was funded by banks, big and small. Now that money supply has been removed, the real estate is still there, the note to pay the loan is still there, but the buyer is gone. Surely the buyer is gone because he or she can’t get credit to buy. This has created a terrible circle of hot potato, and unfortunately the bank will be served last because they are ones who extended the credit in the first place. Banks have been forced to pull together their respective balance sheets, take huge write-offs, and hope that a synergy with another institution can buy them enough time to remain solvent. These short term marriages are kinda like marrying your ex mother-in-law; you’ve been in the same family at sometime, but for sure you’ve been competitors. Long term, these arrangements are probably going to reorganize into separate financial institutions in better days. The Wachovia and Citigroup merger fits into this category. On Friday Wachovia reported as having $63 billion in book value, which would translate into a $30 share price with 2.16 billion shares outstanding. On Monday Citi and the FDIC says it is worth $2 billion. After reading the Citigroup conference call notes this evening, I am still not sure how the arrangement is going to work, but I do know how much equity was lost, and it is painful. I am not sure if the statistic is still true, but in 2005, Wachovia was the most widely held stock by North Carolinians… the loss of equity to our state today is epic, and will be felt by other institutions who held the blue chip security as collateral.

Before the markets in the US open, Asia and Europe will likely weigh in on the events of the day. I clearly recall the crash of 1987 when we took 500 points off in one day and it was a much larger percentage than today’s 777 point fall. I also remember the fall of October 1997, September 1998, January 2000, and September 2001. The current market is most likely in store for more short term redemptions, so caution is paramount. The last day of the quarter will be ugly, even if the market rebounds for the day.

So should Congress go back to the closet, get a pair of clean pants and pass some legislation? Yes. It is in their court now. Wall St. gave them the ball, and they are in control. I have read and highlighted all 106 pages of the bill this evening, and it is not very complicated or bogged down with special provisions… it is very understandable to someone who has knowledge of markets and securities. I am not certain how another bill will get passed or if this one will see minor adjustments, but since Washington is now involved, we as taxpayers and investors need them to act."

So get on the horn. Contact your Congressman and make this change happen. Here is how you can send them an email:

No comments: