The Bottom Line

Averting Disaster

Volume IV Issue IV – Wednesday April 30, 2008

A monthly newsletter of financial commentary for our friends

We have seen some new developments since our last commentary. It is too early to tell if we are seeing a changing of the guard as far as trends are concerned, but the developments are noteworthy nonetheless. Since 2005, the investments that have worked have been gold, energy, international stocks and bonds, and other commodities. Especially in late 2007 this was the case. Recently gold has retreated off its highs by a little over 10%, but remains positive on the year by about 3%. Oil is near $115 a barrel today, just under the all time high. Silver is down 20% from its highs, lumber has already established a downward trend because of the construction market, and wheat is off its highs by 35%. Is it possible that these asset classes are due for a break? Is it even possible that there has been a commodity bubble forming, and we are seeing the first signs of some air being let out? Only time will tell if this is a short-term rest or a long-term trend we are watching develop before our eyes.

The Fed cut the Fed Funds rate again today. This time it was 25 basis points. We sit at 2% at the present time, down from 5.25% some months ago. Some analysts believe the Fed is done. If that is the case, then we are near the bottom as far as CD and money market rates go. Treasury Bonds have seen their yields actually rise in recent weeks. This may mean that the bond market is sending the message to the Fed that they need to be finished with lowering rates. And all the seniors living on CD interest just said, “Amen!”

I wanted to take a moment to frame what happened on March 17 of this year with Bear Stearns. To set the stage, please note that this stock was trading at $155 one year ago today. On Thursday, March 13, Bear Sterns contacted the Fed, telling them that they were 1 day away from filing bankruptcy. To make a long story short, Ben Bernanke had the weekend to put together a deal to prevent Bear from closing their doors on Monday morning. They partnered with JP Morgan, one of the only mega banks with a strong enough balance sheet to do the deal. JP Morgan agreed to buy the company with the backing of the Fed for $2 per share. Did you pay attention to how much the company was worth one year ago? That is a massive evaporation of value in a matter of days. So the company did not go broke, thanks to the Fed and to JP Morgan. What if they had? It is my personal belief that we may have seen a serious injury, maybe even a crash in financial markets within a matter of days. Remember that companies borrow from one another on an overnight basis all the time. If the overnight loans that Bear Sterns were liable for defaulted, it would likely created a domino effect from creditor to creditor. Even more dangerous than the direct effects would have been the loss in confidence in credit markets. Lending might have almost come to a screeching halt, with no one trusting anyone. Confidence is the most important ingredient in Capital Markets, and it almost evaporated within days. I believe that there will be books written about the conversations and decisions of those 48 hours, and how the leaders involved steered this economy from the most dramatic crash it has seen since 9-11, 1987, or maybe even the Great Depression. Pretty intense huh? You may have been better of not having known all that. Sometimes ignorance is bliss. Then again, sometimes we need be reminded to be thankful for disasters in our economy (and our own lives for that matter) that were averted without our even realizing it.

Chad P. Wilson, CFP

Foundation Bank – a division of McKenzie Banking Company - 731-554-2423          

The above is strictly informational commentary and does not constitute any sort of recommendation. Please consult your own financial adviser for specific tax, loan, or other investment advice.