Email – #417

It used to be that one could enjoy a nice Sunday at the park with the kids. Stuff just didn’t happen on Sundays. Bagel shop parking lots were full of the faithful. The less religious would be riding their bikes down the street, and the super unfaithful would be getting out of bed just a little later than usual to indulge themselves with a morning coffee and a fat Sunday paper.

Not anymore. Now, I have to worry about investing seven days a week, not just the usual six. At this particular point in time you may not agree that I merit a raise…but it sure feels to me like I do.

This weekend there was another major blow-up. Ho-hum, it’s like hearing the latest Britney Spears misstep. Instead of Ms. Spears flashing her privates in public, we have companies like Bear Stearns flashing their privates. Neither is a pretty sight. Except Britney’s plain loco, while Bear has immediate impact on our collective wallets.

Could Warren be wrong?

Everybody turns to Warren Buffett as the greatest investment mind of our times. Yet, Warren is making missteps all over the place…and so is Bill Miller at Legg Mason. Both are heavy into the financials. Buffett has been buying companies like Wells Fargo, USB and Bank of America at MUCH higher prices. Miller thought financials were undervalued a couple of months ago…oops. Well, I must admit, I agree with both gentlemen, but I just don’t get the type of press they do. So, few if any are likely to quote my name in the same breath.

There are reasons to be bearish and reasons to be bullish. But, regardless of what you read here or elsewhere, fear will rule the day today and probably many more days like this. You will act according to your fears despite what I or anyone else says. After all, when a company can lose 97% of its value overnight after assuring you that all was OK, anything can, and usually will, happen. But…. not so fast. There are other happenings that do merit a mention or two. First, the Federal Reserve is active in the market providing a backstop to money center banks…
the types of banks that take up a couple of slots in our portfolio. Bear Stearns was a very specialized operation, which was not diversified, and built much of its business on the back of trading mortgage derivatives. The Fed also has availed its borrowing window to many more companies, including investment banks, in an effort to stem the tide. And we now have three major events that are occurring concurrently – events that usually signal we may be closer to the end than the beginning: First, investors are scared. Second, brokers are scared. And third, we have had a major financial collapse.

In this type of market, nothing is sacred except a short position, and we have a couple of those, through our bear spreads or our covered positions. Tech stocks, drug stocks, financial stocks – are all down. Even commodity shares will head lower in the face of reduced demand. Times are tough, but the crisis is not one of liquidity. It is one of confidence. And that type of crisis will only dissipate with time. If I had the Fed’s ear, I would implore them to show their faith in the markets by not lowering rates any further. There is more than enough money floating around out there with rates at the current levels. The problem is not money, but confidence. And one way to shore that up is for the government not to act like there is a panic.