Tuesday, September 16, 2008

Cash Is King

The market opened under heavy selling pressure again, but that pressure has since subsided. This could be due to short-covering ahead of the Fed meeting this morning, but the indexes have all bounced more than +1.5% off their early lows. The Nasdaq 100 is positive right now.

AIG was down another -50% at the open (amazing) after the company had its credit ratings downgraded at S&P and Moody's. Wamu (WM) also had its outlook downgraded. These ratings agencies are unbelievable. First they greenlight millions of mortgages that should have never been written, and now with firms under severe stress they come out with downgrade after downgrade. Who needs them?

The financials are higher this morning, led by Wells Fargo (WFC) which is up +10%. Goldman Sachs (GS) was down more than 10% on its weak earnings report, but has since recouped much of that. And Monsanto (MON) is up +2.25% after raising its 2008 earnings guidance.

The Fed meets today, and has already pumped liquidity into the system today. Central banks have also added liquidity, with the Bank of Japan adding 1.5T Yen to their system, and China cut interest rates last night to boost its now slowing economy. But Asian markets were still down sharply overnight, with many of them losing more than -5%. Russia was hit especially hard.

In economic news, the August CPI fell -0.1% due to the drop in fuel costs. This is welcome news to consumers, and I heard that the drop in oil below $100 will act as the equivalent of a $100 billion tax cut.

The dollar is higher today vs. the Euro, which is helping pressure commodities further. Gold is down along with oil, which dipped below $91 this morning. The 10-year yield hit 3.25% this morning, its lowest level since June 2003, but has since bounced to around 3.34%.

In this environment, many investors are thinking that cash is king. Risk aversion begins to take over, but there is also significant deleveraging going on across the globe. So big players are raising cash and that is weighing down asset prices across the spectrum.

While some will say things are different now, I would argue they are not. When Drexel Burnham went under in the 80s, it was also a very big deal. And in 1990, over 1000 banks failed. That was a big deal as well, so big that the govt. had to create the RTC. So while the names and players change from one cycle to the next, fear and greed remain the primary drivers on the Street.

At some point, the markets will bottom and fear will have overbalanced on the scales. The markets will rally and all that cash sitting on the sidelines will come back into investments that can earn a higher rate of return. Just like after October 1987, just like in 1990, just like after 9/11, and just like after Oct. 2002. I still have some hedges on, and plenty of cash to weather this, but I will be ready to take advantage of these declines when I see signs of stabilization.


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