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Markets: Tailspin
New York: July 21, 2008
By John R. Stephenson

"What's good for General Motors is good for the country."

-- "Engine Charlie" Wilson, 1952

"I am confident IndyMac will be a survivor."

--Michael Perry, CEO of now defunct IndyMac Bank, May 12, 2008

What a week it's been! General Motors announced another round of layoffs. IndyMac Bank fell and the Fed bailed Fannie and Freddie out of crisis. Oil swooned as investors fretted that a slowing global economy would curb energy demand.

The markets have been taking it on the chin lately, leaving investors scratching their heads and wondering what to do. Making matters worse, it seems to have hit home so suddenly.

The crisis at the IndyMac Bank seemed to epitomize the suddenness of the slide. It was only a few months ago that Michael Perry, the bank's CEO, was assuring investors that everything at the bank was fine. Business had been booming for quite some time as IndyMac Bank gorged on fat profits from a new product — Alt-A mortgages, which featured particularly lax credit standards.

With real estate values plummeting across America, the bad bets that companies such as IndyMac Bank had been making were coming home to roost. Faced with a run on the bank, it was forced to close its doors, leaving depositors in the lurch. The images of long lineups of desperate depositors outside its doors seem to say more about the true state of the U.S. financial system then the assurances of politicians and the Wall Street elites.

For banks and bankers the bad news isn't over yet. To really understand just how bad things have gotten in America, you need to look no further than the actions of the country's chief banker — Ben Bernanke. Faced with a desperate situation, he has been forced to go to extraordinary lengths to avert a total collapse of the financial system. In order to shore up the balance sheets of the nation's riskier financial institutions he has had to ruin the Fed's balance sheet in the process.

Whether it is the weekend bailouts of Freddie and Fannie or the pre-arranged marriage of Bears Stearns and JP Morgan, Ben Bernanke and his gang have been working overtime. To keep up he has overstepped the traditional role of central banker in order to save the system and the confidence in the system that is crucial for the economic health of the nation. Whether it is accepting bottom of the barrel subprime mortgages for pristine U.S. treasuries, this ultimate insider has tipped his hand at just how bad things really are out there. And there is no end in sight.

Figure 1: Bank Stocks Are in the Dumps


Sixty years ago, the health of General Motors was thought to synonymous with the health of corporate America. Today, GM is a shadow of its former self. The once mighty industrial giant is in fact a very small concern. The market capitalization of GM is tiny, at just $7.46 billion (Toyota Motors is $140.6 billion) and is immobilized with legacy issues, such as the soaring cost of healthcare for its employees. It like many of its banking brethren had a finance arm that amongst other endeavors got into mortgage financing in a big and bad way.

What ails the U.S. banks and General Motors is what is ailing America right now - the greed and stupidity of a tiny minority. The great thing about capitalism used to be that it rewarded those that made the biggest contribution to profits and growth. Many of those who became rich over the last few years did so by creating massive bubble in mortgage-related finance that when it burst, risked the health of the entire U.S. financial system. They created a massive mess and rather than making amends, they have passed the buck. The burden placed on Ben Bernanke is indeed an enormous one.

The pain administered to the stock market for these transgressions is far from over. Gold is rallying, which is a signal that all is not well with the health of the U.S. financial system. But what will eventually emerge when all is said and done is a massive opportunity for investors to buy some of their favorite resource stocks at a steep discount.

We believe that the silly talk in the U.S. Congress about "dirty oil", while stupid, shifts the risk/reward ratio towards natural gas-weighted stocks and away from oil-weighted stocks in the near term.

The agriculture theme remains strong and investors should look toward recent market weakness as a buying opportunity for some of their favorite agriculture names. With stormy weather throughout the Midwest destroying crops and sending grain and soybean prices higher, the fundamentals for this investment class continue to improve.

While times may be tough, for investors willing to stay the course, we believe that the upside potential is enormous. The growth globally has not been coming from North America or Europe but rather from Asia. While growth in that part of the world may be somewhat slower than in previous quarters it is robust and remains a powerful catalyst for what we are advocating.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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