Stocks plummet as U.S. Government takes hard line
In its biggest drop since 9/11 stocks plummeted today in the wake of a Bankruptcy filing by Lehman Brothers, the venerable 158 year old investment Bank. The Dow was down 505 points.
Television cameras in New York City filmed thousands of Lehman employees streaming out of their building carrying personal effects and family photos.
The Lehman filing continues the wave of problems that have hit the financial sector as the housing market has crumbled after years of low interest rates and substandard lending practices inflated home prices. Next on the list of troubled companies is AIG, Washington Mutual, Wachovia and others in the financial sector. A bright note: Bank of America bought Merrill Lynch, taking them off the troubled list in a stock for stock deal, at a 40% premium to Friday’s close. At this writing shares of Bank of America tumbled 21% in the wake of the deal, and Merrill shares have risen only a penny from Friday’s close suggesting that the market does not believe in the deal.
Several mutual funds held shares of Lehman all the way down. Value funds were particularly involved. Also required to own shares were Index Funds because the S&P Index funds are required to own all companies in the index-Lehman being one.
The crisis has been brewing for some time, but came to a head Friday at 6:00PM when the Treasury summoned 30 Wall Street Executives to a meeting at the Fed’s offices in lower Manhattan. At the meeting Secretary Paulson told the executives there would be no Federal bailout and to get busy. Frantic discussions ensued throughout the weekend, but in the end Lehman filed for Bankruptcy at 11:59 PM Sunday night (you can do that in New York).
Fed officials showed their resolve. They also brought the financial system to the brink of collapse, and dealt Obama an Ace to play in the election
Also, in an unusual session at 2:30 PM on Sunday, government officials hosted a trading session so that firms could square their books in anticipation of the Lehman collapse. This was followed by a trading session of the International Swaps and Derivatives Association, a trade group, which lasted from 2:00 PM to 6:00 PM on Sunday. (You can do that in New York too)
In additional developments, a consortium of banks pledged $70 Billion to mitigate market volatility. The Federal Reserve broadened the collateral they would accept for loans, and pumped $70 Billion into the monetary system. These actions were taken to avoid a total collapse of the banking system.
In another development, the price of a barrel of oil dropped over $5.00 which is good news for drivers and the Federal Reserve’s battle against inflation. It opens the door to a Federal Reserve rate cut at their Tuesday meeting, something they should not just consider, but should do. (They won’t)
The Dow was down 4.42% today; the S&P down 4.65%, our portfolios significantly outperformed both indices, although we also were down. (Individuals portfolios vary). As you know, we have largely avoided the housing and financial carnage. Our biggest losers today were in materials, oil and food. I believe all of these are good long term holdings and represent more upside than downside potential. We continue to maintain a well diversified portfolio. If you have any questions, do not hesitate to contact me.