Saturday, September 13, 2008

Whirlwind Weekend for the Stock Market

On Friday, the stock market settled relatively flat ahead of one of the most crucial 48 hour periods of the last 30 years for the financial markets.

First, a hurricane, half the size of the Gulf of Mexico is making landfall over Galveston, Texas, with reports of levee breaches in New Orleans, and causing 25% of North American refining capacity to be shut down. This has already been felt at the pump, as gasoline around Toronto (where I live) increasing $0.12 to $0.13/litre, and increases of over $1.00/gallon in many states across the U.S. It will be interesting to see whether this impact will be long-lasting, or another short term spike to oil and gasoline prices as it continues to plummet.

Second, and probably more impactful to the financial world, it appears that Lehman Brothers is up for sale, and will probably not make it past the weekend unless someone buys the company out. The real significance is not the fact that this is a Bear Stearns re-dux. The real significance is that this may represent a watershed moment for the U.S., as the Federal Reserve and Treasury allow Lehman Brothers to fail, or at least avoid assisting any party in the buyout process. With Bear, Fannie and Freddie, the Treasury and Fed backstopped the bailouts, allowing the assets to be taken over in a more logical and streamlined way. Should the Fed and Treasury allow Lehman to simply fail, this will at least cause asset prices across the markets (equities, bonds and others) to fluctuate dramatically, and, worse case scenario, could cause a catastrophic domino effect across the financial sector.

In these times, it takes alot of courage to stand in the face of such turbulence in the markets, and like the calm before Ike struck Texas, the markets (overall) showed very little signs of any impending implosion. This market has become a forced test on all investors of their conviction and their ability to stay the course. All I can advise is that these are the best times to learn about yourself, and whether you truly have the right asset allocation to stomach the most volatile of times.

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