What's Up On Wall Street

Yikes! Prices are falling on wall street like an after christmas sale at Costco (ticker symbol: COST). 500 point drop on Monday, 450 points lost yesterday. A meltdown of 7% in 3 days. What's going on here....

I thought I'd offer up some food for thought on a couple of the major headlines from the first part of this week, and follow that up with a couple of bold predictions that are self serving in every sense. First off, let's discuss the general market trend (negative). While the manner in which we arrived at this lull is a bit unique, there was a majority of analysts on the street forecasting this general market direction for this year. Many thought the sub prime hangover would have cleared by Q3 of this year (which it hasn't), but almost all agreed we'd see a declining stock market for the biggest part of the year. There wasn't, and still is not, a strong case that can be made for a sustained turn around in the broad market (my opinion). Sticking to a nice cost average purchasing strategy over time will allow you to pick up some bargains during this downturn that will pay off in the long run.

Next up. Lehman. Well done boys. You managed to sink a 158 year old company in a little under a weekend. I wonder who has dibs on those giant televisions that cover their times square office? Hang a couple of those in the courtyard of my complex here at lund and we could have a nice little side business charging 50sek a person to watch Sarah Palin interviews on the 'big screen'.

Merrill Lynch. This company has been included in my 'axis of evil' for sometime now. They once employed a woman who was once my boss who is the closest thing to the anti-christ you can find this side of Hades. Good riddance (to both).

AIG. Wow, nothing like having to shore up the liquidity of an insurance company right in the middle of hurricane season. This deal however, is worth commenting on. The basic jist of this deal is that AIG is going to be given a high interest rate (11.5%) loan from (you) the taxpayers in return for roughly 80% of the equity in the company and a promise to repay. Now, here is why this deal is a good deal (kind of). The government has long made a tradition out of NOT taking an equity stake in companies when they provide assistance to them. They have essentially loaned money to companies at a (below market subsidized) rate the company is believed to be able to pay them back at. If the company can pay it back, then fine. Taxpayers essentially are squared on the deal. The problem with that arrangement is that there is no added return for the government taking on the high level of risk associated with simply lending a failing company money. For the added risk, the bank (in this case the fed) should get to participate in some of the upside appreciation of the equity in the firm. Well, that's exactly what's going to happen with the AIG deal. The government (you all) now own 80% of AIG. Assuming they are able to pay back the loan (which by all accounts they should be able to) and that in turn raises the value of the companies equity (share price), everyone will win. Here's some food for thought.....now, with a virtually endless supply of capital that the majority shareholder of the company sits on, it seems unlikely they will allow this operation to fail as they have an 80% interest to protect. Therefore would it be wise to partner up with your federal government and buy a stake in the $2/share company? Discuss among your friends.

With all that digested let's look at what I think are some screaming deals on wall street.

Goldman Sachs (GS) - This stock hit a low yesterday of $97.78/share which would give it a PE ratio of 4.66. Historically banks are bargains when trading around a PE of 7 (assuming said bank isn't out of money and named Bear Stearns). Now, it did recover late in the day to a close of $114, so tread cautiously as more bad news will continue to sink it in the short term.

John Deere (DE) - I originally purchased this stock after the first of the year at $90/share. I wanted to take advantage of the hype in ag. While the hype continued as predicted, DE wasn't a benefactor of the rise and has since dropped to $60/share (thank you oil). With some short term trading, some double downs, a lot of profanity and a couple of dividends I managed to eek out a small positive on this play for the year. With the dust settled, deer trading in the 50's is a steal. It's close yesterday was $59.92. If it gets much lower (despite the fact I should probably remain liquid) it will be time to back the truck up and load up!

I guess there's always next year right?