I have seen mountains move.
We have seen a number of unprecedented events occur on Wall Street in the past few weeks. So many that seemed impossible just a month ago have now come to reality.
I worked at Merrill Lynch in the late 80’s and while it was not a firm to my liking, no one could argue that it was a franchise that was arguably the most powerful on Wall Street. The Thundering Herd, it was called, well known for its ability to take any offering from capital markets, like any new issue bond or stock and sell it to it’s customers. This, of course, made it the darling of Wall Street but maybe not so much the darling of its retail customers.
The idea that Merrill is gone, in a manner of speaking, is astonishing to me. I was looking for an analogy that could best describe the feeling I had. It was as if you woke up one morning and the Rocky Mountains were no longer there. It feels just like that to me.
If you have money with Merrill I’m sure it is safe. Don’t forget it’s the actual investments you have in your account that matter. Not so much the firm that is holding them. Brokerage firms have SIPC insurance which will guarantee up to 400k in securities and 100k in cash. Most large firms carry excess coverage as well. Check with your individual firm about this.
Lehman and AIG were two more shockers, and AIG (American International Group) is the biggest surprise of all.
The two firms offer an interesting contrast of how two differing paths took these powerhouses to the same awful result. It’s important to understand the difference between liquidity and solvency.
Liquidity in this case is the amount of cash that is available to pay current liabilities.
Solvency is about a company’s ability to meet its short and long term obligations.
Lehman had lots of liquidity. A healthy amount of cash-on-hand, but it was, in effect, insolvent.
AIG was solvent, meaning its companies were operating at a profit but it lacked enough cash to keep its operations going.
These two different paths arrived at the same result.
AIG’s businesses are so wound up in the fabric of our society that the Federal Reserve determined that it could not let it fail. It effectively will loan AIG up to $85 billion, at an interest rate of 8 ½% over Libor which is an international rate that represents the cost of money. The Fed will take full control of the company on the taxpayer’s behalf and slowly sell off its pieces to get its money back plus interest. Whatever is left over will go to shareholders. There are approximately $2 billion shares outstanding and the stock has traded between 2 and 4 dollars a share. Doing the math, some think there will be $4 billion dollars left over.
What is at play here is the domino effect. This is the part that becomes unsettling. “Which domino will fall next?” is the question everyone is asking. If institutions that were once deemed too strong to fail are taken to their knees in a matter of months, how can anyone be certain about the investments they own? What is the meaning of a Blue Chip Stock? Is this a tectonic shifting of the landscape? The financial landscape that is changing so slowly and imperceptibly, that it is impossible to perceive? Or is this a standard, garden variety economic contraction that will work itself through in short order?
I’m thinking the former rather than the latter.
So what do you do? First of all the only thing you can do is to determine what is in your control and what is not. The market is never in your control. The fates of corporations are not in your control.
You can control your emotions, what you are invested in and you can control your household budget.
With regard to your emotions….
Think like a contrarian. If you have a long time frame to invest, remember the words of The late Sir John Templeton when he said that investors should buy at the “point of maximum pessimism”.
Some bond fund managers are saying they are seeing deals in the corporate bond market that haven’t been seen since the 1970’s. Find good bond managers that show success in this area.
Question authority. This is quote from an article in the WSJ.
If the financial world really were coming to an end, nobody would know it — least of all the pundits who are currently crying doom. In 1929, experts ranging from the legendary trader Jesse Livermore to John D. Rockefeller and Treasury Secretary Andrew Mellon all declared that falling stock prices were nothing to worry about. They were wrong. The lesson is not that it’s a mistake to be an optimist in falling markets, but rather that it’s a mistake to trust the consensus view of the experts. With the mood on Wall Street now as dark as a mushroom farm, optimists are much more likely than pessimists to be proven right in the end.
If you truly cannot sleep at night, sell off some stocks, or move some of your money to bonds or cash. But do so a little bit at a time, and talk to your tax adviser first in order to maximize the considerable tax benefits you may be able to get out of these incremental moves. By the time you get any money moving, the panic may already have passed.
As for your investments:
Know what you own. Make a list. Talk to your advisor. Go to the library and look at Value Line and Morningstar. Go online. Research. If you can’t understand it, pay someone who is unbiased to give the full picture. Take Control.
And your personal budget….
Match your spending to your income NOW! Stop pretending you are wealthier than you are. The piper will have to be eventually paid, and that can get nasty.
Save some Money. Have an emergency fund. Get to the point where you are not living from paycheck to paycheck.
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I have seen mountains move.
We have seen a number of unprecedented events occur on Wall Street in the past few weeks. So many that seemed impossible just a month ago have now come to reality.
I worked at Merrill Lynch in the late 80’s and while it was not a firm to my liking, no one could argue that it was a franchise that was arguably the most powerful on Wall Street. The Thundering Herd, it was called, well known for its ability to take any offering from capital markets, like any new issue bond or stock and sell it to it’s customers. This, of course, made it the darling of Wall Street but maybe not so much the darling of its retail customers.
The idea that Merrill is gone, in a manner of speaking, is astonishing to me. I was looking for an analogy that could best describe the feeling I had. It was as if you woke up one morning and the Rocky Mountains were no longer there. It feels just like that to me.
If you have money with Merrill I’m sure it is safe. Don’t forget it’s the actual investments you have in your account that matter. Not so much the firm that is holding them. Brokerage firms have SIPC insurance which will guarantee up to 400k in securities and 100k in cash. Most large firms carry excess coverage as well. Check with your individual firm about this.
Lehman and AIG were two more shockers, and AIG (American International Group) is the biggest surprise of all.
The two firms offer an interesting contrast of how two differing paths took these powerhouses to the same awful result. It’s important to understand the difference between liquidity and solvency.
Liquidity in this case is the amount of cash that is available to pay current liabilities.
Solvency is about a company’s ability to meet its short and long term obligations.
Lehman had lots of liquidity. A healthy amount of cash-on-hand, but it was, in effect, insolvent.
AIG was solvent, meaning its companies were operating at a profit but it lacked enough cash to keep its operations going.
These two different paths arrived at the same result.
AIG’s businesses are so wound up in the fabric of our society that the Federal Reserve determined that it could not let it fail. It effectively will loan AIG up to $85 billion, at an interest rate of 8 ½% over Libor which is an international rate that represents the cost of money. The Fed will take full control of the company on the taxpayer’s behalf and slowly sell off its pieces to get its money back plus interest. Whatever is left over will go to shareholders. There are approximately $2 billion shares outstanding and the stock has traded between 2 and 4 dollars a share. Doing the math, some think there will be $4 billion dollars left over.
What is at play here is the domino effect. This is the part that becomes unsettling. “Which domino will fall next?” is the question everyone is asking. If institutions that were once deemed too strong to fail are taken to their knees in a matter of months, how can anyone be certain about the investments they own? What is the meaning of a Blue Chip Stock? Is this a tectonic shifting of the landscape? The financial landscape that is changing so slowly and imperceptibly, that it is impossible to perceive? Or is this a standard, garden variety economic contraction that will work itself through in short order?
I’m thinking the former rather than the latter.
So what do you do? First of all the only thing you can do is to determine what is in your control and what is not. The market is never in your control. The fates of corporations are not in your control.
You can control your emotions, what you are invested in and you can control your household budget.
With regard to your emotions….
Think like a contrarian. If you have a long time frame to invest, remember the words of The late Sir John Templeton when he said that investors should buy at the “point of maximum pessimism”.
Some bond fund managers are saying they are seeing deals in the corporate bond market that haven’t been seen since the 1970’s. Find good bond managers that show success in this area.
Question authority. This is quote from an article in the WSJ.
If the financial world really were coming to an end, nobody would know it — least of all the pundits who are currently crying doom. In 1929, experts ranging from the legendary trader Jesse Livermore to John D. Rockefeller and Treasury Secretary Andrew Mellon all declared that falling stock prices were nothing to worry about. They were wrong. The lesson is not that it’s a mistake to be an optimist in falling markets, but rather that it’s a mistake to trust the consensus view of the experts. With the mood on Wall Street now as dark as a mushroom farm, optimists are much more likely than pessimists to be proven right in the end.
If you truly cannot sleep at night, sell off some stocks, or move some of your money to bonds or cash. But do so a little bit at a time, and talk to your tax adviser first in order to maximize the considerable tax benefits you may be able to get out of these incremental moves. By the time you get any money moving, the panic may already have passed.
As for your investments:
Know what you own. Make a list. Talk to your advisor. Go to the library and look at Value Line and Morningstar. Go online. Research. If you can’t understand it, pay someone who is unbiased to give the full picture. Take Control.
And your personal budget….
Match your spending to your income NOW! Stop pretending you are wealthier than you are. The piper will have to be eventually paid, and that can get nasty.
Save some Money. Have an emergency fund. Get to the point where you are not living from paycheck to paycheck.
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Posted in On The Money! Commentary | Tags: advisors, AIG, finance, investing, Lehman, market, unprecedented events, Wall Street