Market Mayhem Newsletter - September 19, 2008

Generated from archive.

### Your weekly guide to navigating the financial storms and spotting the sunshine!

Market Snapshot

* S&P 500: 1,255 (+0.3% WoW) *[Volatile week! Closed higher on TARP rumor]* * Dow Jones: 11,388 (-0.3% WoW) * Nasdaq Composite: 2,273 (+0.6% WoW) * Brent Crude Oil: $104.55 (+3.2% WoW) * Gold: $864.00 (+11.5% WoW) *[Record 1-day gain]* * Lehman Brothers: $0.00 (-100% WoW)

Market Mayhem: Executive Summary

* Mood: "Existential Panic" * Driver: Systemic Failure * Theme: "The Week Wall Street Broke" — There are decades where nothing happens; and there are weeks where decades happen. This was one of those weeks. A 158-year-old bank vanished, the world's largest insurer was nationalized, and the money market broke the buck.

Key News & Events (The "What Happened")

1. Lehman Brothers Files for Chapter 11: The unthinkable happened Monday morning. No bailout. $600B in assets frozen. The largest bankruptcy in U.S. history. 2. AIG Nationalized: The Fed stepped in with an $85 billion credit facility to save American International Group, taking a 79.9% equity stake. "Too Big to Fail" is now official policy. 3. Merrill Lynch Sold: In a shotgun wedding, Bank of America agreed to buy Merrill Lynch for $50B to prevent it from being the next domino. 4. Reserve Primary Fund "Breaks the Buck": The $62B money market fund saw its NAV fall to $0.97 due to Lehman exposure, triggering a run on the safest asset class in the world. 5. SEC Bans Short Selling: In a desperate move to stop the bleeding, the SEC halted short selling on 799 financial stocks.

Top Investment Ideas (The "Alpha")

### 1. Gold (The Ultimate Haven) * Rationale: Trust in paper assets has evaporated. Gold posted its largest single-day gain ever ($70) as investors fled counterparty risk. * Key Risks: Volatility is extreme; margin calls elsewhere could force liquidations.

### 2. Treasury Bills (Cash is King) * Rationale: With money market funds breaking the buck, the only safe place is 3-month T-Bills. Yields briefly went *negative* as panic buying set in. * Key Risks: Negative real returns.

Notable Signals & Rumors

* Signal: TED Spread Explosion: The spread between T-Bills and Eurodollars hit record highs. Banks are too terrified to lend to each other overnight. * Whisper: "Paulson and Bernanke are cooking up something massive over the weekend. A 'TARP' to buy toxic assets? $700 Billion?"

Policy Impact & Geopolitical Outlook

* Central Banks: The Fed is flooding the system with liquidity, but the gears are stuck. The discount window is wide open. * Politics: Presidential candidates Obama and McCain are suspending campaigns to deal with the crisis. Washington is in shock.

Deals & Corporate Actions

* M&A: Bank of America buys Merrill Lynch ($50B). * M&A: Barclays picks up the carcass of Lehman's North American operations for a song ($1.75B).

Earnings Watch (Next Week)

* Goldman Sachs (GS) & Morgan Stanley (MS): The last two standalone investment banks. Can they survive, or will they be forced to become bank holding companies?

Thematic Deep Dive: "Moral Hazard is Dead"

For years, the "Fed Put" protected risk-takers. On Monday, Hank Paulson killed it by letting Lehman fail. By Tuesday, he realized he made a mistake. By Wednesday, he bailed out AIG.

We are now in uncharted territory. The government is now the insurer of last resort, the lender of last resort, and the buyer of last resort. The free market for financials has been suspended.

Year Ahead Forecast

Bearish. This isn't a correction; it's a deleveraging event. The credit crunch will hit Main Street hard. Cash is your best friend until the toxic assets are cleared.

Quirky Sign-Off

> "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance." — *Chuck Prince (Citi CEO), famously wrong last year.*

The music has stopped.

--- *Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice. Past performance is not indicative of future results. Do your own research before making any investment decisions.*