The Current Market: Banking Crisis of 1907 Redux?

 |  Includes: DIA, SHY, SPY
by: Andy Abraham

Another dismal day on Wall Street with rising defaults on consumer loans, Fannie (FNM) & Freddie (FRE) falling to 10 year lows and not to mention Citigroup (NYSE:C) and General Motors' (NYSE:GM) grave downturns.

So really what is one to do? Many times throughout my career I am amazed at how markets can react violently. Markets go to extremes never anticipated. A prime recent example is the NASDAQ of 2000. Who really would have thought it would fall so dramatically, and 7 years later still significantly below the highs. Again really what is one to do?

My wife loves to call me obsessive compulsive paranoid and at times like these I greatly appreciate her loving compliment. I am a true believer that anything can happen and would strongly suggest to you to take into account this premise.

As much as history changes, many times it is very similar. I always try to learn the lessons of history. What I want to share with you here is the Banking Crisis of 1907. It is so similar to today that it is eerie. The Banking Crisis of 1907 had numerous causes, but was brought about initially through schemes and manipulations by Knickerbocker Trust and Bank of North America. The crisis swirled out of control which caused a retraction of loans and liquidity. Runs on banks and trust companies became common place. A recession ensued and eventually the stock market fell 50%. Eventually 1 year later, through the efforts of George Cortelyou - the Secretary of the Treasury at that time - and JP Morgan (NYSE:JPM), the Banking Crisis that shook the country subsided. Cortelyou earmarked 35 million dollars to shore up the banks. JP Morgan in conjuction with other banks bought plummeting stocks, secured international lines of credit and enhanced money flow between banks.

I believe that, potentially, not just a bear market is on the horizon, but rather a perfect storm of diverse elements potentially causing a far more serious condition. As stated, prudence and capital preservation are my paramount concerns. However, with that said, there are always oppurtunities to make money, but one needs to be available for those oppurtunities. There are always opportunities for profit at all times and in all markets. There is a gamut of markets available for one to trade.

Some money managers who truly understand risk made fortunes in the current situation. One such manager Balestra Capital Partners earned over 165% YTD. There are always bull markets and bear markets and prudent money managers can take advantage of these. In 1973-1974, fortunes were made in the commodity markets even though the stock market endured a slow and grueling bear market. One has to decide what is their comfort level, and who to associate themselves with.

As for prudence, instead of money markets and cash equivalent funds, buy short term US Treasuries registered in your name [even though they have reached the lowest levels in 2 years]. Next, take a hard look at your stocks and mutual funds. I understand that being a long term investor is a cherished idea, but in Oct 2002 the S&P 500 fell more than 40%. The NASDAQ is still down. It took 25 years for the stock indices of 1929 to come back. Japan is still down from 1989 more than 50%. Even Warren Buffet's Berkshire Hathaway (BRK)was down almost 50% in the 2000 bear market.

How much pain and aggravation do you want to go through? Again - Do you truly believe Anything can Happen? History has proven that Anything can Happen.

At times like this I appreciate my wife's label "obsessive compulsive paranoid."