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.

"Fear Strikes Out"

Yesterday was another tough day.

I expected a big decline on Monday and the rally we got on Tuesday.

I thought that, in light of the AIG bailout, we might see something more normal on Wednesday. Perhaps even a rally.

Instead we opened down 300 points.

I was a little depressed and I went home for lunch. (Something I almost never do even though it is only 10 minutes away.) I wanted to hug my son. Alexander is now 2 1/2 and still cute as can be! He still doesn't talk much and is struggling a little getting potty trained.

I walked in and he saw me and started chanting, "I go potty. I go potty."

Sharon said she was mad at him and I asked why and she said, "Alexander tell your father why I'm mad at you."

"I pooped my pants," he said.

I started laughing and almost immediately felt better. There are a lot of things in life more important than work and money and while the content of his sentence wasn't all that wonderful, hearing him utter another complete sentence was music to my ears.

I came back to the office somewhat refreshed and invigorated and had a number of good conversations with clients, friends, and others I trust.

HERE IS MY TAKE ON WHAT IS GOING ON RIGHT NOW

We are all standing nervously in front of two doors.

One of those doors leads to oblivion, a complete collapse of the world economy, a return to the dust bowl era of the Great Depression.

The other door leads us through the final throes of this agony into the light of a new day.

I don't see a third option. It seems to me that it is one or the other; either things are going to get better or we are headed towards a financial disaster of Biblical proportions.

I believe that the signs point towards door number 2. I don't think we are headed into a second great depression.

As bad as the market has been this week, most of the damage has been in the financial sector. (General Mills was up a $1 today.)

There is a long history of a major brokerage house falling, as Lehman Brothers did the other day, at the bottom or end of a decline.

Oil is down.

Inflation is no longer a concern.

Manufacturing remains strong.

The economy has problems, but those problems are fixable.

Today, Thursday September 18th.

This morning, after thinking about what I had written yesterday as I stared down my fears, I purchased two stocks: Citigroup and United Technologies.

Citi is down 73% from its all-time high and more than 30% from when I sold off half of our position earlier this year. The stock has an 8.5% yield. Those kind of bargains just don't come along every day!

United Technologies is down 30% this year, with a 2% yield, a P/E of 13, and a growth rate of 11%. It is a great manufacuring company and the only reason it is down so much is that everyone is in a panic.


This afternoon, we got great news. Treasury Secretary Henry Paulsen announced a plan to create a government entity similiar to Resolution Trust Company that would buy up the bad debt in exchange for some Equity and save the banking system.

THE MARKET IS UP 400 POINTS!