Jack is a very successful conservative (evangelical Christian) former securities trader who heads his own boutique investment management firm. He and I shared office space in San Francisco and he invited me to prayer breakfasts and Bible studies at the Bank of America top floor with people who wear more suits in a week than I own period. It was very interesting to see genuine conservative evangelical Christians in a city that some on their own side want washed away. . .
Until I moved away, Jack and I would argue over politics for hours, and even in our differences, I've always found Jack to be the sort of man who talks and walks straight and kindly.
He sent this letter out today and I received his permission to post it, since between the Des Ford and Darwin discussions, money matters too. - Alexander Carpenter Disclaimer: This is not financial advice from me, Spectrum or Jack to you. Do not use it as such. ____________
I have had a number of you contacting me about the woes in the financial markets so let me briefly opine on my take and how I see things developing and how your stock accounts will be affected.
Today, we had the largest one day drop pointwise in the S&P 500 and DOW - EVER. Although percentage wise there have been greater drops, it certainly gets our attention. All of you who are in the market have less today than yesterday. The quarter closes tomorrow so be prepared for sticker shock when you see your brokerage statements in about a week. The DOW is at the same level it was three years ago. Oil prices dropped 11% today as fears of a deteriorating worldwide economy hints at lessening oil demand. The stock market lost $1.1 trillion in market cap just today. To put it in some perspective, the $700B "bailout" package represents 3% of the New York Stock Exchange.
Obviously, the House voting down the $700 billion package surprised nearly everyone and that's what killed the market. What is happening really is the sub-prime mortgage crisis has caused this and the government wanted to buy these "toxic mortgage-backed securities" up to $700 B worth at fire-sale prices - hopefully. If and when these mortgages get paid off, then the government will get paid back and, perhaps, even make money on it as an investment. If the mortgages were purchased on an average of about 50 cents on the dollar, the government stands to make about 12-13%. The risk is if the purchases are made at above market rates and/or the mortgages totally fall apart and then the taxpayers will bear the cost after all. However, the term "bailout" is a misnomer. It is an investment made by the government to help stabilize credit in this country. Former Secretary of Labor, Robert Reich has called this "socialized capitalism."
What the real problem with the package failing today is that it has caused the credit markets to become fossilized.
It will be nearly impossible for anyone to get credit for car loans, school loans, housing, and general purchases. If it continues, the economy will grind to a halt, there will be massive layoffs, no credit for payrolls and inventory purchases leading to recession and a severe one - perhaps, a depression.
The international stock markets when they open shortly will probably experience a bloodbath. When the U.S. market opens tomorrow, the fall could very well continue. Because of the Jewish holiday tomorrow, no work will be done on a new House package. Most likely, it will not come to another vote until Friday or next week. If a package is passed next time, the stock market should soar. The longer they wait, the longer the stock market and credit markets and the economy will languish.
This is not a bailout of Wall Street and a brush off to main street as some critics of the package have asserted. Wall Street is Main Street. The little guy/gal - you - me - will be affected by this. Already your stock accounts are declining. The government buying distressed mortgages because banks can't has to be enacted. Ideologically, many may feel the government has no business in this and let banks and investment banks fail and let the chips fall as they may. Such draconian measures are too horrific to imagine.
Until this package is passed or some reasonable facsimile, the stock market will roil. When passed, the stock market will bounce back. The longer they wait, the worse all this will become. When it comes to equities, I encourage you to think long-term. The short-term picture is ugly.
I am hopeful that things will work out, probably over an 18 month period.
Jack W. Bellingham Registered Investment Advisor President Bellingham Investment Management
Alex: When I asked Jack about posting it on our blog, he told me to tell those Adventists, "w/o the package, they'll live to witness Armageddon. . ."
This is a companion discussion topic for the original entry at http://spectrummagazine.org/node/1012