Economy

The final hour finished down big on high volume with the Dow off 504 points and the S&P 500 down 59.

A question of vital importance is whether the recent dollar rally is real or fake. If fake, it is an engineered outcome of central bank policy (US, EU and JP combined) and it will fail, possibly spectacularly.

Things are certainly progressing at a very fast pace.  I find it
inconceivable that Bank of America (BAC) would step up and buy Merrill
Lynch (ML) on such short notice.   ML is heavily exposed to the same
stuff as Lehman, and we know that today (Monday) is going to see some
heavy trading in the derivative markets as a result of the bankruptcy
filing by Lehman.

Oh, man.  After posting that prior article below, I was waiting for the right article to appear to post next.

Here it is, served up on a platter:

[quote]

NEW YORK (AP) — As the outlook for Lehman Brothers dimmed Sunday, U.S. and foreign banks were pressed to create a plan aimed at inoculating the global financial system against the investment bank’s failure, a top investment banking official said.

Banks were in tense talks to create a pool of money worth up to $100 billion to lend troubled financial companies, the official said on condition of anonymity because the discussions were ongoing. And officials at the U.S. Treasury and the Federal Reserve were expected to announce they are prepared to be more generous in the Fed’s emergency lending program for commercial and investment banks.

[/quote]

This is an incredible headline. It is incredible news. Be sure you read the punchline all the way at the bottom.

[quote]Largest Financial Powers in the City Meet After Day of Hysterical Liquidation Sinking Prices Below Thursday’s
By Laurence Stern

After the stock market had come crashing down again in a veritable deluge of forced and hysterical liquidation, word sped through the financial district last evening that the largest banks in the city were prepared to exert their organized power this morning to prevent further disaster.

Arrangements described as "fully adequate" were completed at a conference at the offices of J. P. Morgan & Co. at Broad and Wall Streets…

Although no formal statement was issued, it was the consensus of those at the meeting that the worst of the liquidation is over and that a natural demand for investment stocks now available on the bargain counter should go far toward an immediate restoration of trading stability.[/quote]

It looks like we’re headed for liquidation. Nobody has any idea what this really means or how this will play out in the derivative markets.

Just a little more context for the brewing Lehman situation.

Ah, heck, I go to all the trouble to write up my thoughts, and then the WSJ puts out an article that I could have simply posted instead.

The Lehman Bros. talks have not yet resulted in a solution.  A rabbit had better be pulled out of the hat prior to the open of the Asian markets, or there are going to be some additional management problems inserted into the mix.

Here’s my read on this fast-developing situation.

This weekend, financial and government officials are furiously seeking a solution to the bankruptcy of Lehman Brothers, and, I would suspect, Washington Mutual.

The financial crisis is now officially at the dangerous stage, where any slight miscalculation or misstatement could send the markets into crash mode.  This deserves your very highest attention.