Thursday, October 9, 2008


Unlike the 1929 one day crash, this one is happening over a week. There has to be a lot of forced selling due to margin calls that is causing an acceleration of losses during the last hour. The Dow has settled out with close to a 679 point decline today with most of that in the last hour.  Iceland has pretty much collapsed. Gold continues to rise.   I have to think that the central banks are running out of bullets and the measures taken in the past week can fairly be characterized as smelling of desperation. Anyone heavily into margin 2 weeks ago has probably been liquidated by now or very close to it.   I am seeing a lot of chaotic trading in investment grade bonds.  The JZJ that I bought yesterday continued to decline and there was some deterioration today in the price of the underlying bond.  Part of the problem today was the lifting of the short sale ban on financials.  Allowing short sales on downticks is undoubtedly aggravating the problem, and permitting this practice is just one of the many failures of the SEC led by the former Republican congressman Chris Cox.  Some of these failures are summarized in this article.Seeking Alpha  

Cox replaced the Democrat Donaldson in 2005 and the SEC has been controlled by the GOP since that time.  The 2004 rule change allowing investment banks to increase their use of leverage by a factor of 3 or more in some cases was done by 3 Democrats and 2 Republicans. 

It is possible that this was a climax selling day.  Any recovery from this point will be slow under the best of the circumstances.  Less than a year ago, the Dow hit 14,280 and from that number this average has now declined  40%.  As I mentioned the other day in an email, it would be prudent to cut out all spending that is not absolutely necessary for at least 6 months until we have a better feel of how far this will go into the real economy.  

I will continue to nibble but I am going to limit myself now to investment grade bonds in TC form that are now yielding  14 to 20% and just quit trying to catch the falling knife in closed end investments companies for now.  It still seems prudent to me to reinvest dividends to buy additional shares of the closed end funds currently owned by me. That is simply a way to force an averaging down process that one day may look favorable sometime in the distant future.

I simply have to take advantage of the prices being offered in investment grade bonds.  One closed today at a 70% discount to par value and  at a 28% yield. A few other higher rated ones are yielding around 15% now.

I would think this recent action may very well sour millions on the market as an asset class.  It will take a very long time for confidence to return.

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