Sorting Through the Wreckage
by Jay L. Gershman
Trying to understand the financial mess our country is in must feel like living in Galveston, Texas and staring at a pile of rubble that used to be your home. During the same period that hurricane Gustav hit New Orleans and Ike blew through Houston, sub- prime loan troubles rolled over Fannie Mae, Freddie Mac, Lehman Brothers, and AIG Insurance. In case you missed it, the U.S. Government through the Federal Reserve, in unprecedented moves, took over the two mortgage giants and the largest insurer in the U.S. in order to avoid further deterioration of a fragile global financial system. In an equally calculated move, the Fed watched as Lehman Brothers, the 4th largest brokerage firm, filed for bankruptcy and Merrill Lynch was bought by Bank of America.
An optimist standing in front of a pile of timber can envision a beautifully rebuilt home overlooking a gorgeous ocean. A pessimist asks, "Who should I sell my property to?" As an advisor, the events of the past fifteen months have been extremely difficult to interpret and using typical sources of information has proven useless. To use one example, one Thursday morning several months ago, CNBC interviewed the CEO of Bear Stearns who assured the viewers that the investment bank was in a solid financial position. On the following day, according to my memory, the stock lost approximately 50% of its value to close at $29 per share. On Sunday, it was rumored that the company would be bought for $18 per share. On Monday morning, Bear Stearns was acquired by JP Morgan for $2 per share. From $60 to $2 in two trading days. So much for re-assurance!
What kind of advice am I qualified to give? To be honest, nothing more than a historical perspective that reminds me that we conquered inflation and high oil prices in the 1970's, the stock market crash of 1987, the 3 year real estate mess of the early 1990's and 9/11 and the accounting scandals of the early part of this century. Unfortunately, I don't have the inside facts that our Federal Reserve has to be able to better predict the possible outcomes of this mess. Instead, I'll focus on what I do know;
One positive: Oil has dropped from $147 per barrel to $91 yesterday (9/16/08), despite being repeatedly told (the world is coming to an end) the next move was $200 per barrel.
Two negatives: Due to the recent business failures, more workers have been laid off in the last week than expected. Business failures and their falling stock and bond values add more write-downs to the balance sheets of already struggling institutions (banks, investment banks, insurers). Write-downs cause even more capital to be raised or face a fire sale.
One reality: The economic a recovery appears to have been pushed further out but the markets will generally rise when they feel the end of the problems have arrived.
Besides that, I'm just like every other prepared Texan last week, huddled in the safest place I can find, hoping for the best. If I said anything else, I'd be lying. At this point, selling is like deciding to board up your windows in an 80 mile an hour wind. Don't expect me to hold up one end of the plywood. I'll stay where I am and I suggest you do the same. Remember the old adage, "This too shall pass".
I'm always here to listen.
Jay L Gershman
Securities offered through Securities Service Network, Inc., member FINRA/SIPC. Advisory services offered through SSN Advisory, Inc. Office of supervisory jurisdiction, 10207 Technology Drive, Suite One, Knoxville, TN 37932, 865-777-4677"