Crisis Averted

Today we got some more good news from Capitol Hill. Lawmakers came together and have reached an agreement to fund the $700 billion "bailout" of the financial industry.

I was surprised how many people and how many commentators were against the idea.

As I wrote last week, the alternative was a financial disaster of unprecendented proportions.

Imagine a world where you can't borrow money to buy a car or a home. Where many companies could not borrow money to finance their operations. Companies like GM going out of business as a result.

I think we were looking at skyrocketing unemployment, maybe as high as 20-25%. Massive bank closings. Frankly, I felt that the the cost of paying out the FDIC claims would have been far greater than the "cost" of the bailout. That was easy, because the "cost" of the bailout is negative.

The government will make money on this. They will buy these mortgages for less than they are worth and eventually will turn a profit. That is what happened in 1991 with the Resolution Trust Company.

There is one problem with this plan, the Treasury will need to borrow more money to finance the purchase of these bonds and that is inflationary and bad for the dollar.

I believe we are in the tail end of a bear market that is about to celebrate it's 9th year. That is a long bear market. One of the four longest in the last 108 years.

I don't think that we are about to see the market take off. I do think we have seen the bottom. That bottom is around 10,800 on the Dow.

Over the next several weeks, we will look to modestly restructure our portfolios to take advantage of the next 6-18 months. Looking out past that period, we can begin to see the outlines of another robust Bull Market forming that will carry stocks into new, as yet unimagined, territory.

Meredith Whitney on the Cover of Fortune

I often look for contrarian signs at the top and bottom of market cycles. Things like a USA Today cover showing bulls charging up the steps of the New York Stock Exchange with ticker tape streaming from their horns or cartoons of bears feasting on the carcass of a rotting bull.

I saw something today that struck me as such a sign. I’m talking about the picture of Meredith Whitney on the cover of Fortune magazine. I met Meredith at my 1st Wedding. She was a guest of one of my more successful Cornell friends and she made it obvious that she felt she was slumming in New Jersey in the company of a bunch of Cornellian’s. (Ms. Whitney was a graduate of Brown living in Manhattan. And, for what it's worth, my now ex-wife had a similiar attitude towards the Cornell gang!) At the time she was working for CIBC and someone suggested that we might have something in common since we were in the same industry. We had a strained conversation for about an hour the night before the nuptials until one of us made some excuse.

Needless to say, I was somewhat surprised to see Ms. Whitney become the most recent Wall Street darling and overnight sensation in October of last year when she correctly predicted capitalization problems at Citi-Bank would lead to a dividend cut. Since that time she has been a regular on CNBC and the other financial broadcasts. After my wedding she parted company with my friend and married a professional wrestler and part-time financial expert.

For the past 9 months, she has been ubiquitous in the financial press. Appearing everywhere with a message of doom and gloom for the capital markets. Analysts who vault to fame are usually short-lived and they usually continue to re-broadcast their original, award-winning, message. Anyone remember Elaine Garzarelli Joe Granville, or Abby Cohen? I think seeing Meredith on the cover of Fortune may be a sign that the worst of the credit crunch is behind us.