To OTC Journal Members: 
 

Would You Believe?

Wow- what a week. I'll tell you this with a great deal of certainty- we are living through a period of financial upheaval that happens once in a century. If I would have made the following predictions six months ago, what would you have said?

• Bear Stearns would no longer exist
• Lehman Brothers would filing for bankruptcy and cease to exist as well
• Merrill Lynch would no longer exist and become Bank Of America
• Bret Favre would be the starting quarterback for the New York Jets, and be playing the New England Patriots (without Tom Brady)- the New England Patriots would have a starting quarterback who hadn't started a game since High School, and still win the game.

As to the banking system and how it's effecting our economy. Here's information you wouldn't believe if you didn't catch it here.

The US economy is facing a liquidity crises- funding is simply not available for transactions that have occurred in the normal course of banking business for decades. Why? Here's the facts.

Banks and other lending institutions are being slammed with a triple whammy- and it's killing their ability to finance normal transactions. This will blow your mind.

Thanks to the Draconian accounting principles that govern our world, the auditors are forcing institutions to value their loan portfolios at nearly zero. My mortgage, your mortgage- your neighbor's mortgage- all being booked at nearly zero even if they are performing loans. The "new" accounting standards require a valuation based on the "bid" of the asset- not the intrinsic value. Hence, the monster write downs.

So, when banks have to write down the value of loan portfolios, more capital is required as reserves against losses and defaults. Now- guess what happens when a bank sets aside capital in its loan reserves? the amount they set aside becomes taxable income- that's right- taxable income.

So, as it stands today, banks have to write portfolios of loans down to nearly zero, set aside more cash for loan reserves, and then pay taxes on the money they set aside. Hence, the freezing up of our whole finance structure.

Here's the oversimplified solution. First, the banks need to be allowed to carry good loan portfolios with some value. They need relief from these Draconian accounting principles- I heard one journalist refer to it as "Death By Accounting".

Second, they need liquidity from the FED so they can make loans and therefore make money.

Third, they need relief from the tax treatments when they increase their loan reserves. This will loosen up capital and help the economy get back on track. The subprime mortgages have created a daisy chain of infection for the performing mortgage pool.

Now, on to the subject of AIG (NYSE: AIG). This behemoth insurance company does business in 140 countries. Thanks to the requirements associated with the drop in the ratings from the agencies, AIG has become illiquid- not to be confused with Insolvent. The assets of AIG far outweigh the liabilities, but they just don't have cash right now, and are required to come up with a lot.

The government did not bail out Lehman Brothers (NYSE: LEH), but I believe it will bail out AIG. We'll know in the next couple of days. This will provide the market with a boost, if and when it happens. If AIG files for bankruptcy, the market will get absolutely pounded, and the Bear Market low will be established.

BTW- if AIG does declare bankruptcy, and the market gets pounded, I would be looking at Goldman Sachs (NYSE: GS)- they have basically won in the subprime meltdown, and will be the last one standing in a route of the entire system. When banking comes back, they will be commanding some impressive fees and get very strong margins.
 

China Energy (OTC BB: CGYV)- Nearly Perfect Bad Timing

New idea China Energy was off to a rough start. Its maiden trading day of OTC Journal coverage was this Monday. It was probably the second worst day to introduce a new idea this decade- The first being September 11, 2001. Out of the 3657 days that will make up the first decade of the 21st Century, this was one of the worst two days. It's hard to time anything so perfectly badly. 

If you jumped in early, then watched the stock follow the market down, you should have sold when it dropped below $3. That was my SSL, and I'm sticking to it. You lost a little money, but you'll live to trade another day.

The usual contingent of whiners who blame me personally for the Bear market were gleeful as the stock rolled down, and were quick to point out we hadn't had a big winner in some time. 

However, one issue struck me as worth noting. None of the bashers could find much wrong with the company. Sure, the stock traded poorly the first day, but there's lots of opportunity ahead for the company to get recognition.

It seems like September is now the new October. We were all conditioned to believe the markets did poorly in October, having been witness to Black Monday in October of 1987.

Sorry we got out of the gates so poorly. However, just look at the numbers. They are impressive, and growing. $3 was my SSL, and I'm sticking with it. If you were just in it for a trade, you should be out. But, if you like it as I do, you might want to think a little longer term. The choice is yours.

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