The Monthly Stew: Bear Market Edition

20) Main Street vs. Wall Street
If I hear one more TV commentator or politician reference how the current financial crisis is now affecting Main Street, I'm gonna lose it. Anytime the stock market loses 40% of its value, it affects everyone. And Average Joe always stands to lose the most.

I'm waiting for the never-to-arrive day when a politician stands out in front of their own home modeling a foreclosure sign. I’d pay big bucks to see a politician host a press conference detailing the plight on Their Street. Big bucks.

19 The World Financial Summit
These are rough times. But never – and I’m talking never ever -- has there been a comparable coordinated effort across nation states to mend the world's systematic ills. And on November 15th the G20 (the world’s most industrious 20 countries) will meet in Washington to pump up the volume of unison some more.

If you ask me, interdependence – the old “one for all” adage – is a darn good thing when you’re sitting in a row boat with a sizable leak. If the world is flat, and we’re going to sink or swim together, doesn’t that have to be a good thing?

18) The Financial Services Modernization Act of 1999
In 1933 Senator Carter Glass and Rep. Henry Steagall worked with President Roosevelt and got Congress to pass the Glass-Steagall Act, which separated investment institutions from commercial (savings and loan, mortgage) banks. But in 1999 Citibank spent over $150M lobbying Congress to repeal the law so that they might be allowed to merge with Traveler’s Insurance.

Citi’s efforts were successful and in 1999 Congress created the Modernization Act, paving the way for investment and commercial bank mergers, which ultimately lead to the new institutions pushing subprime mortgages and other insurance and derivatives products, like credit default swaps, because these high-yielding instruments became "investments" instead of old-fashioned, financial or mortgage products.

17) Paulson’s Testimony to the Senate Banking Committee in 2000
On the heels of the Financial Services Modernization Act, Hank Paulson, who in 2000 was the CEO of investment bank Goldman Sachs, lobbied Congress to allow investment houses to increase their leverage using risk-based models, instead of cash-on-hand.

[W]e and other global firms have, for many years, urged the SEC to reform its net capital rule to allow for more efficient use of capital. This is the single most important factor in driving significant parts of our business offshore, so that our firms can remain competitive with our foreign competitors risk-based capital standards must become the norm. The SEC has made it clear that risk-based capital rules can be implemented only when the Commission is confident that firms employing value-at-risk models have robust credit and risk management policies in place.

In 2004 the government changed the risk-based capital rule, allowing investment firms like Goldman to decrease their required cash-on-hand to pay for debts and exposures. A decision which is unanimously considered to have aided the current meltdown.

16) Government Sachs
Paulson’s testimony before Congress didn’t hurt his professional career. In 2006, Paulson succeeded Paul Snow as U.S. Treasury Secretary. A position which, allowed him to bring in numerous Goldman all-stars to the Treasury department, thus earning the Treasury department the nickname: Government Sachs.

15) 35 year-old Neel Kashkari
Speaking of Paulson’s posse, don’t forget this name. Kashkari is Paulson’s protégé, and the man who has been tapped to lead the distribution of the $700 billion authorized by Congress.

Not an insubstantial piggy bank for a 35 year-old to play with.

14) 8.625 Cents on the dollar
That’s how much bonds issued by the now-bankrupt Lehman Brother were worth in last Friday’s auction. That’s right: one of the most established investment banks in the world had outstanding debt obligations more than ten times greater than assets. As to how that could happen, see #17 & 18.

13) Volatility
500 point intra-day point swings have been the norm recently on Wall St. In fact, the Chicago Board Option Exchange Volatility Index (.VIX) measured the last two weeks as the most volatile two-week period in history. Granted, that doesn’t mean a whole hell of a lot if you’re investing for the long haul, but it equates to a near term gold rush for traders.

In other words, if you know someone who trades options or futures on the floor of an exchange, mandate that they host Christmas this year. And tell them that you are expecting an oversized turducken. It’s the least they can do.

12) Dividends
Dividends are currently to stock owners as Santa Claus is to children: not to be discounted or messed with under any circumstance. And in my opinion, rightly so.

The Dow is now flat over the last decade, but that doesn’t mean you didn’t make money on stocks, even if your portfolio performed alongside the Dow. Lots of (relatively) conservative stocks pay dividends of 3 – 5% annually, which if reinvested on a quarterly basis or annual basis, is just like earning compounded interest, regardless of the performance of the stock itself.

Duke Energy and Baxter Healthcare are two company’s which pay a dividend and should be well positioned to weather a recession. Baxter happens to be sitting on $28B in cash, never a bad thing when the economy is in flux.

11) “Buy American. I am”
The man who wisely warned that derivative-based financial products were potential “weapons of mass destruction”....the same man who cautioned, “beware of geeks bearing formulas".....the Oracle of Omaha, Warren Buffet, is now advising investors to do something counterintuitive: buy American stocks.

Buffet's recent OpEd detailing his bullish perspective is here.

10) The Grape of the Month: Vodka
In times like this, an adult beverage with a measly 12 or 13% alcohol content (a typical percentage for wine) doesn't cut it. When you’re watching Wall St. crumble and the Dow sell off 1000 points in a day, something stronger is required. I prefer vodka.

Svedka, Skyy, Ketel One, and P.I.N.K. (the most awfulest naming decision in the history of spirits) all make my list of winners.

9) Domestic Auto Sales Reach 25-Year Low
How bad is the climate for auto-makers? New sales in September were a mere 9.3 million, the lowest level in twenty-five years. Related note of buggery: the number of drivers has not decreased over that interval.

Worse, the most recent Consumer Confidence Report notes that only 1.5% of Americans plan to buy a new car in the next six months – an all-time low for the survey.

Times are tough in Michigan. Muy mal indeed.

8) Kerkorian sells 7.3 million shares of Ford
Billionaire investor “Captain” Kirk Kerkorian, who amassed a 6% ownership stake in Ford, partly with hopes of facilitating a merger with Nissan, sold over seven million shares of Ford last week at a loss (on paper) of over $700M. The fact that he sold those shares with Ford trading at an ungenerous $2 per share is indicative of something.

Muy mal comes to mind again.

7) WWHD?
In the first two decades of the 20th century entrepreneurs, especially in the automotive industry, often mused: what would Henry (Ford) do? A century later, the combined market cap of Ford & GM is estimated to be 1/10 of Toyota, and bankruptcy talks are beginning to swirl for the automotive giant.

If I were a manager at Ford, I'd wonder WWHD. And then I'd pray.

6) Where is da paper?
This is arguably the tightest commercial lending market since the 1930s. Banks are not lending amongst each other, and they are certainly not lending to consumers.

A likely next step for the Fed? To guarantee intra-bank lending amongst commercial banks (in the case of default) with hopes of opening up the credit markets. A crucial step towards recovery.

5) The Bear Market Quote of the Month
Senator Jon Tester of Montana: “I am dirt farmer. Why do we have one week to determine that $700 billion has to be appropriated of this country’s financial system goes down the pipe.”

4) The Next Treasury Secretary of the United States...
Forget the VP candidates. Is anyone else more than a little curious as to who will replace Paulson? And wouldn’t you feel a little better if the candidates were throwing out names?

Doing so would allow economists and former Secretary’s to scrutinize the prospects, and it would also force the would-be heirs to detail some of their plans in advance of being selected. Truly, I see no downside here.

Instead, we will wait in suspense for an appointee post-election. Unfortunate, all the way around.

3) “Fear Castrates Soft Commodity Market”
How about the recent nose-dive in the price of oil?!?!? Prices per barrel were in the $140 range this summer, but as demand decreases and fears of a slowing global economy are factored in, the price of crude has fallen precipitously, as have the stock prices of most producers and suppliers.

Paying $3 for a gallon of gas as opposed to $4 can do a lot for the psyche. Even if your next move is looking at your $401K balance and deciding once and for all, that it’s time to sell the car.

2) Regional Banks
This is the subset of the economy that interests me the most. Most regional banks are/were sizable players in the mortgage business but not involved with risky derivatives like credit default swaps. Inasmuch, some regional banks have strong balance sheets, while others are in terrible shape.

My question: over the next decade, will we become a nation of giant banks, whose hands will be locked with the goverment? Or will regional banks see a resurgence due to their knowledge of local markets and brand loyalty with customers?

Regardless, I think more regional banks stand to be acquired -- some of which will offer a handsome return to shareholders in relation to their current stock price.

1) Watch the Dollar
When economic times are tough, international corporations and foreign governments seek haven in the U.S. dollar. And guess what, as bad as things are domestically, they're doing it again: the dollar is strengthening, particularly in relation to the Euro.

If the day ever comes when that reality changes, and the Nikkei or the Yen (for example) become the most trusted currency in the world, that will be a very telling day indeed.