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The Market Speaks . . . Investors Rush for the Exits

Posted by Larry Doyle on February 17, 2009 8:12 AM |

Equity markets around the world are sufferring significant pullbacks overnight and this morning in the United States. What are the issues? Hope is a lousy hedge!! What does that mean? If we are relying on hope, rather than well defined plans to turn our economy and banking system, then investors are headed for the exits!

Let me highlight specific situations:

1. Banks around the world facing imminent downgrades in their credit rating due to continued pressures on their earnings capabilities and expectations of increasing defaults in their loan books.

2. Auto companies in the United States were supposed to deliver restructuring plans today. The market believes this situation is likely headed to a government backed bankruptcy. 

3. Hedge funds are receiving notification that Wall Street banks are significantly pulling in, if not totally reneging on, credit lines. What does this mean? Many funds will have to find financing elsewhere or liquidate the business which means selling assets which will put further downward pressure on many sectors of the market.

4. U.S. government bonds have rallied by 10 basis points overnight in a “flight to safety” trade. While government bonds are gaining support given equity market erosion, I still believe our enormous deficits will drive interest rates higher. 

5. Markets are not impressed with both the substance and the style of the Obama administration and Democratic Congress. Private capital is SERIOUSLY questioning if and how it wants to partner with them. Given the increased concerns about the impact of the stimulus plan, the uncertainties of the newly designated Financial Stability Plan, and who only knows what the budget may look like, investors are selling assets.     

President Obama grandstanding by signing the stimulus bill in Denver, and Pelosi and team jetting off to Italy for a “work related boondoggle” do not inspire confidence

6. What do do and where to hide?

Cash is King!!

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