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The Financials Pit Review

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For the week of September 15th, 2008

Tue, Sep 16 2008, 05:48 GMT
by Kalvin O’Brian

Pit Guru

U.S. Economy

Without a doubt, the big news is the fourth largest securities firm going bankrupt. It appears that when Fed chairman Ben Bernanke said in April, “the financing we did for Bear Stearns is a one-time event,” he meant it. Taking this stance, U.S. regulators are betting that the financial system will be able to endure the failure of a large institution without severe disruptions to an already fragile economy. This is an interesting but important decision. Central banks across the globe have scrambled to dole out credit to keep everyone afloat. Bank of America has picked up Merrill Lynch and now everyone will be wondering who is next – AIG or Washington Mutual? The big question is going to be, who will be left standing? This market is still facing some big problems and Lehman is just another victim. I do not expect this bear market to end quickly. The Fed meeting tomorrow should be interesting and may give a glimmer of hope, but the deeper we go the harder the climb back will be.

Currencies

The US dollar has shown amazing strength over the last 2 months. The dollar has gained over 11% since hitting the all time low vs. the euro on July 15th. I believe that the dollar will continue to pull back in the short term as the interest rate hike people were so sure of will probably fail to materialize.

The Canadian dollar climbed for the first time in a week, the largest increase in 3 weeks. Unfortunately, the pullback in crude prices after Ike will take a toll. Selling pressure will also come as Canada sits too close to the US to not reap some of the same financial upset that we saw this weekend. The US is the main export destination for Canadian goods; therefore, a weak economy to the south should provide a catalyst for a lower move in the Canadian dollar.

The euro has the chance to come back after an extended slide but the economic crisis is global – not local – and trouble in the markets will affect economic stability and growth in the euro zone as well.

Published on  Tue, Sep 16 2008, 05:51 GMT