This weekend proved to be dramatic and historic for Wall Street firms and the headlines will no doubt be daunting today so I'm writing because I expect you have questions about how this affects your investments.

 

In the first place, I'm pleased that none of our client accounts hold any shares of either Lehman Brothers, Merrill Lynch or AIG. While this does not mean there won't be declines in your accounts, as the impact of the volatility is being felt everywhere today, these will be mitigated and will be the result of fears about the overall market, rather than losses specific to your portfolio.

 

The fourth-largest investment bank in the US, Lehman Brothers, succumbed to the subprime mortgage crisis and filed for bankruptcy, as potential buyers Barclays and Bank of America abandoned takeover talks over the weekend. Lehman Brothers, the 158-year old firm, said it intended to file for Chapter 11 bankruptcy protection, which allows a company time to reorganise and devise a plan to pay creditors. The bank, which employs 25,000 staff worldwide, has seen its share price tumble 94% in the year to date and is essentially worthless today. It is a component of the Dow Jones Industrial Average so its decline will have an impact on the Dow.

 

Another Dow component, AIG, which was once the world?s largest insurance company by market capitalization, is planning a massive reorganization of its businesses, including the sale of a leasing division that owns 1000 planes, to improve its cash position and allow it to continue operations. AIG?s shares are trading lower by over 50% today as compared to Friday?s closing price and has lost over 90% of its value this year. It remains to be seen how this situation be resolved.

 

Finally, investment bank Merrill Lynch, which has suffered over US $52 billion in losses and writedowns from subprime-mortgage related securities, agreed to be taken over by Bank of America. Merrill Lynch has seen its share price fall by 80% since peaking at US $97.53 early last year. Only a few hours after announcing it would not be acquiring Lehman Brothers, Bank of America said it had agreed to buy the Merrill for US $50 billion in a deal that will create the world?s largest financial services company and end 94 years of independence for the company with the iconic bull logo.

 

Oil prices today have declined by over US $4 a barrel, partly out of fears of a global economic crisis and partially out of relief that refineries in the gulf of Mexico were not significantly damaged by Hurricane Ike over the weekend. This decline in oil prices has dropped the price of a barrel below the US $100 level and bodes well for contained inflation going forward.

 

Fears in the financial sector and lower oil prices are also causing shares on the TSX to trade lower today as did shares in Europe and Asia overnight.

 

The unfortunate reality of what's taken place is that before markets can recover, companies that have made mistakes must go out of business or be taken over by competitors at discount prices. Much like a forest fire clears deadwood for a new phase of growth, companies that survive such crises emerge stronger and in better competitive position going forward. The sad impact on employees is the ugly side of capitalism.

 

So far this year, investors have seen names such as Bear Stearns, Countrywide Financial, Lehman Brothers, Merrill Lynch, Fannie Mae & Freddie Mac disappear and we are pleased none of these were in our client portfolios. It is during times like these that a disciplined and balanced approach helps protect portfolios by allowing investors to sidestep these landmines that create permanent losses of capital.

 

Seeing your account decline in value is never fun but it's the permanent losses that really hurt you because living to fight another day is the best you can hope for during times like these.

 

Update: 5:25 PM.

 

WOW. What a shitty close.

 

In the last hour, the markets got worse and worse and you know what? It was even worse than it looked to the untrained eye.

The fact that the market opened down but not out and slowly weakened throughout the day is MUCH worse than just sold off in a panic and stayed down all day. The market never panicked, never threw in the towel, just got progressively worse every hour. Horrible, horrible day.

 

I was hoping for a bloodbath in the morning and some tiny recovery in the afternoon but this is really the worst kind of day.

 

The longer people thought about it, the worse it seemed to get. That's the worst way to fall. Massive plunge is a much better omen because panic selling is the last sign of a market bottom.

 

Rats.