Monday, September 15, 2008

Bad News and Good News, The Essence of All Life

Harry got up
Dressed all in black
Went down to the station
And he never came back
They found his clothing
Scattered somewhere down the track
And he won't be down on Wall Street
in the morning - New York Minute by the Eagles

New York City 036590

Today is a day of real turmoil for people that pay attention to financial markets. The events of today will also impact billions of people that pay no attention to stocks, bonds, and bankers.

Downtown Charlotte 42493

The price of a barrel of oil has fallen by nearly $5.00 so far today. However, the price of gasoline at the pumps is rising rapidly. Many large oil rigs in the Gulf of Mexico were destroyed, or at least severely damaged by Hurricane Ike. Refineries near Houston, Texas were very badly damaged.

Several of the largest financial institutions are rapidly crumbling. Lehman Brothers, 158 years-old, will not make 159. Merrill Lynch was sold to Bank of America, on a Sunday, after it became so unstable the bankers feared it might follow Lehman Brothers down the tubes. AIG, an extremely large insurance firm, is turning to mush. The investments AIG made with people's insurance premiums turned sour, real sour.

U.S. Capitol 19914

U.S. federal and state tax revenues for 2008 will fall far, far below the most pessimistic estimates of government accountants. This is partially due to the bank failures and hurricanes but also a result of ordinary consumers sensing bad times ahead. When people stop shopping tax revenues plummet.

So where might the good news be?

Banks, brokers, and the government agencies that barely regulate them are now being forced to closely examine the situation. Accountants and the auditors that may have overlooked the value of certain financial instruments must absolutely put a value on things. The infamous CDO's or collateralized debt obligations, that is, collections of loans like home mortgages will need to be examined more closely than ever before. Short sellers, people that gamble on falling prices, will be confronted with new, tougher SEC rules designed to prevent fake fire sales of otherwise profitable companies. Buying and selling is normal in any marketplace. Tricking people into buying and selling by spreading false rumors should not be the norm.

Downtown Charlotte 42502

Trying to reform thieves may be an impossible task but efforts must be made when the looters are literally stealing the thin floorboards remaining under the U.S. economy

Speaking of looters, the oil firms will need to rebuild those refineries and oil rigs. That will require BP, Shell, Exxon, and others to spend some of the billions in profits they recently reaped from inflated oil prices. Insurance companies will need to pull billions from their deep pockets to pay for some of the damages from the hurricanes. Weak insurance firms, like AIG, may well fail under the stress of these obligations. While those are mostly Texas-specific events, there will be some ripples from that re-construction spending spreading to other parts of the U.S..

Smart Car Annapolis 57993

In a New York Minute
Everything can change
In a New York Minute
Things can get pretty strange
In a New York Minute
Everything can change
In a New York Minute - The Eagles

Beer, wine, and liquor sales will no doubt increase as many people try to drown their sorrows.

Parents still need to buy their children clothes for school, new shoes, and gifts for the holidays.

Finally, politicians that spend tax money like it is an endless source of wealth will now be required to face the truth. Earmarks and boondoggles designed to buy votes and get a Senator or Representative re-elected will no longer be tolerated. The Chinese simply will not keep covering U.S. debt forever.

Reaching The Bottom

Rich people may decide that now or perhaps in the next few weeks is a prime time to buy huge amounts of stocks. While this is always an uncertain guess, the prices of certain major firm's stocks are unlikely to get much cheaper. For example, now that Merrill Lynch has found a buyer, Bank of America, their stock has recovered 25% from Friday's prices.

Consumer products firms like Procter & Gamble or Wal-Mart will probably see business as usual. People need their soap and a place to shop for such products. While new car sales will continue to fall people still need transportation so used car buying and selling will benefit. Auto parts sales and repair shop incomes may well see a boom ahead.

Human life and all the activities tied to it will still continue. In fact, as young couples cut back on the number of times a month they go out for dinner and a movie more babies will probably be conceived. Internet activity and the telecommunications and computer-based firms tied to that activity could very well increases in revenue. After all, it costs less to use the Internet for human activity than it does to get in your car and drive somewhere.

Technology may well cause economic slumps, like the current one, to be shorter. People can that know how to use technology can make changes in their lives much more quickly.

And in these days
When darkness falls early
And people rush home
To the ones they love
You better take a fool's advice
And take care of your own
One day they're here;
Next day they're gone - The Eagles

Humans and the markets they create always follow cycles, up and down. Deep drops, even the Great Depression of the 1930's, are eventually followed by increases in the future. On a day like today it is tough for people losing their careers to see any bright side but that is exactly what is needed. Most of us will wake up tomorrow morning hungry and thirsty and eager to find something new to do with our lives. That is what being human is all about, right?

Note: The author is an investor, but owns no shares in any of the companies mentioned above.

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