Saturday, January 31, 2009

Will the 'January Effect' ring true

Uh, oh . . . one of the oldest Wall Street adages is the “January Effect,” which states that … so goes January, so goes the year. The bad news is that the Dow lost 8.4% this month, the worst January in history, indicating a terrible 2009. A little piece of good news is that the “January Effect” is not ALWAYS correct.

More bad news was Friday’s report that the GDP decreased 3.8% in the fourth quarter, the worst since 1982. More good news is that we were expecting a decrease of 5.5%.

Oh, yeah . . . then there is Warren Buffett’s ageless and priceless advice to … be fearful when others are greedy and be greedy when others are fearful.

Thursday, January 29, 2009

Nothing chills a market like uncertainty

I’ve seen this show before. The best thing about seeing it the first time was that it did eventually end!

There is now much discussion about a “good bank/bad bank” approach to solving the credit crisis. The problem is that banks cannot be sure how much capital they have to lend, because it's impossible to know the value of some of their assets right now. For example, banks don't know the value of their mortgage-backed securities because everybody is afraid to either buy or sell them. Nothing chills a market like uncertainty! The market is frozen.

I was in Texas during the 1988 - 1992 “Savings & Loan Debacle” when the Federal government created the Resolution Trust Corporation to buy the assets from the troubled S&Ls, replacing uncertainty with certainty, while wiping out the shareholders of the S&L. It worked! Credit flowed. The recovery of Texas began.

Doing this on a much grander scale will be much more difficult, but it must be done. Uncertainty must be replaced with certainty, before our national recovery can begin. Everybody will be relieved when this show is over, and we can write/read the “credits.”