In Praise of Candor

The biggest bully, Spitzer, might yet face prosecution. It probably doesn't matter, so great was his fall. Corporate America has much to atone for, but caving into bullies ought to be added to the list. Precious few stood up to them. It could be because in their heart of hearts, much of corporate America knew they were guilty of something.

Bear Stearns (BSC - commentary - Cramer's Take) wasn't guilty of anything beyond poor management decisions. They thought $17 billion in cash would be enough to hold the tide back. Most of the time it would have been, but when the tide came in with over $100 billion in overnight loans no one wanted to renew, the arithmetic was clear, and Bear was thrown under the bus by the Fed and the Treasury.

As I wrote last week, Bear had no friends from the resentment dating back to Long Term Capital Management and their refusal to chip in to save the system. The frosting was the two Bear hedge funds that blew up earlier in this deleveraging cycle and Jimmy Cayne was fiddling at the bridge table. Poetic justice, many would say. A tragedy for those who spent their lives at Bear to see most if not all of their savings disappear practically overnight.

I am convinced that Bear was sacrificed to make the point that the system would be policed and pain would be inflicted. The international financials gods would accept no less. When the Fed followed up with a "disappointing" rate cut of "only" 75 basis points, the dollar rallied a little and commodities plunged. Stocks soared on the belief that a major crisis usually marks the turning point. Also, since the commodity trade has been the only big winner for many hedge funds, the first sign of a downtick accelerated the rush to the exit so gains could be locked in. Bottom-fishing in the battered financials and retailers caught on.

The spread between two-year and 10-year Treasuries is a steep 1.75% vs. the average of 0.88%. Borrowing cheaply and lending at the higher rates will allow many banks to rebuild their profitability, made more sure in that it is the federal government you're borrowing from!

Saurday's WSJ reported that demand for Treasuries from foreign central banks is running at a high pace. To buy Treasuries, central banks need to buy dollars. The U.S. will need a major effort from the rest of the world to stabilize the system, but I'm guessing that the central bankers are realizing the extent to which they underestimated the impact a plunging dollar would have on their own economies and are rushing to make up lost ground. The European Central Bank injected a massive dose of liquidity on March 18 and the view that they will have to cut rates before much longer is gaining credence.

Stepping to the edge of a financial "nuclear winter," as The Economist put it, seems to have shocked enough that some rationality has reappeared. Expect commodities to continue to correct, the dollar to stabilize if not improve, and financials to lead the market higher.

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Vincent Farrell Jr. is a principal of Scotsman Capital Management. Prior to joining Scotsman in April 2005, Farrell was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships. He is a regular guest on CNBC as well as other national print and broadcast media.

Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.

Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.