Where Do We Go From Here?

Last Friday after Wamu was taken over by J.P. Morgan and Congress was scurring to finalize a Bailout Plan, I said will Wachovia be the next problem? This morning we see that Wachovia's stock evaporated over the weekend as Citigroup and Wells Fargo battled to buy the banking assets. It looks like Citi was the winner (Maybe) but the Wachovia's stock has skidded from $10 to almost zero.

I would not claim to be an expert on Citigroup but it appeared that they still had many financial problems left on their own balance sheet. Citi obviously believes the new deposit base will help solve its own credit problems. It is likely Citi will need to raise additional capital and their stock price could still get hit with any new fundraising attempt. Citi is no J.P. Morgan.

We now have a Government Bailout Fund that needs to be passed by Congress. It appears that will likely occur this week but can the American people feel secure and believe the crisis will ease? No. The stock markets still are showing red ink but they may rally if it becomes clear that the plan will get passed. As we said last week, the new Fund is just a small band-aid to a very large global problem. We have primarily focused on the stress in the U.S. financial system but a weak economy, excess leverage, and a soft housing market are trends that are pervasive throughout Europe and perhaps other parts of the world.

The New Fund will "help" to stabilize the mortgage market in the U.S. but I am most concerned now with the looming financial disasters that may arise around the world. A Global recession is developing and there are too many financial institutions around the world who may have derivative problems, mortgage concerns, capital needs or a host of other issues that could create new alarms to the financial system. Before two weeks ago, how many of you heard of Fortis, Bradford & Bingley or Hypo Real Estate? Fortis is the most known but the other two are not necessarily part of the American vocabulary.

I continue to think our markets will not rise for a while until the global financial system deleverages and the economy stabilizes. This could be a two to four year process. All governments will scramble to put out fires while consumer confidence will continue to erode as Main Street becomes more worried. This spiraling effect will continue to lead the economy down. The underlying positive is that opportunities will develop in the stock market and brighter days are ahead.