The Heisman 10/06/08

Good evening,



Today’s humor -- In light of some of the recent close football games and upsets around town I thought this might be an apropos analogy. Close to this day in 1916 there was a lopsided victory in football history. The most lopsided one I believe. The coach of Georgia Tech was ahead 222 to 0. It’s not very sporting and one would have thought he would have sent in the water boys when they were up by 100. The coach of this team was John Heisman. Yes, the Heisman of the Heisman trophy. It is my understanding he invented half the plays in football – one being the hidden football trick, which was eventually banned. My point is this, the markets are confused, the hidden assets value trick is at it again.


I am a firm believer that uncertainty drives fear. As humans we are fundamentally wired to want control – decision making is a tool in our toolbox of control. Another aspect of my practice is to help people make more successful decisions. The magnitude of decision making over time in today’s world is tremendous. We are now living a second industrial revolution, but instead of steam, the new revolution is information. And, as in the first revolution, relative success will be determined by the ability to handle the propelling force. Do you have a process for decision making ?



Market corrections return stocks to their rightful owners. As Pasteur said, “Chance favors the prepared mind.” I think we are in a recession so in the coming week’s we’ll explore the economic landscape and what that will have to offer.



I hear a lot of people worrying about inflation next year so let’s talk about that for a moment. We will be talking about deflation this time next year. Recessions are by definition deflationary events. Given that we have had two bubbles burst (housing and credit), there is even more potential for deflationary pressures. Add into the mix the deleveraging process, which will take years to finally abate, and the recent bout of price inflation caused by energy and food will pass, as demand destruction for oil will hold oil prices in check.


An excerpt from John Maudlin – I can’t say it better !

“In the next few weeks and months, I think you can count on more extraordinary actions by the Fed and Treasury to try and jump-start the credit markets. Actions which were highly improbable a few months ago will be on the table. Will the Fed open its balance sheet to non-banks? Possibly. If they can guarantee money markets, will there be a scheme to insure commercial paper at some price? Not out of the question. Will European governments take more equity in large European banks? Very likely. Will the Fed and/or the Treasury invest even more capital in larger financial institutions? Given that We the People now own 80% of AIG and 100% of Fannie and Freddie, it is certainly within the realm of possibility that we will be the proud owners of even more private institutions.

Again, this is not just a US issue. We will likely see similar actions in Europe and some of the developing world. This is a worldwide crisis, and the response will be from central banks all over the world.

Understand, I am not advocating these actions. I am simply trying to help you understand what actions might be put into place by the various government of the world in an effort to avoid systemic economic collapse.”

At the end of the day, ask yourself when you believe the recovery is possible. Stay tuned for tomorrow’s prediction for the end of Q3 2009 where I outline our recovery !






Sources: Art Cashin-UBS, John Maudlin and Robin Hogarth – Judgement and Choice. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 6, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.