Decoupling

I was wrong back in June about how the market would break. I guess I was too optimistic as we saw the opposite of what I thought would happen, a 25% drop in the S&P. This has actually created many opportunities in both the credit markets and stock markets. It was thought just six months ago that by investing in BRIC countries you would protect yourself from our downturn. In fact, I argued with a PM at WAMCO about decoupling and how we buy the goods from the rest of the world. Meaning, if we go into a recession, theirs will be deeper and longer. This is now the case as everything as correlated. As fear abounds, smart investors are buying great franchises like American Express or Costco at bargain prices. I believe we are nearing the bottom of the margin calls and a turn in the market. Look for great returns over the next 5-15 years.

BofA aquistions of Merrill

The last few months have given us many surprises, one of which is the acquisition of Merrill Lynch by BofA. What I am having a hard grasping is that Countrywide had one of the riskiest mortgage books in America and for some reason BofA bought them at a very hefty premium, given the fact they were facing bankruptcy. As the management team at BofA reflect on how they can fix their financial strength, I laugh. Now they are going to buy Merrill Lynch for $50 Billion? It is my understanding that most of the Private Client groups will move and the Bankers (whom I just had dinner with) are leaving for Goldman Sachs, Morgan Stanley, Lazard and Evercore. What bankers like Ken Lewis don't understand is that their mindset is very different from an Investment Bankers and a very simple strategy of arbitrage from the Fed, borrowing cheap and lending at higher rates to individuals and companies isn't the same as Investment Banks who value Intellectual Capital with an entrepreneurial spirit. These differences make it impossible for BofA to really make something great with Merrill(not to mention Ken Lewis' ego). In the meantime, many firms will benefit from the brain suck that will happen at ML/BofA. I feel sorry that Main Street has got the short end of the stick again.