There They Go Again

Last we looked the financial stocks were dropping like stones. They have since recovered but the other shoe dropped. WAMU broken and sold to JPM, WB broken and sold to C. Surprised C did that deal since they have been hurting but I bet the Feds strong armed them to take it on their balance sheet. In turn C will probably dump WB bad assets into the bailout pool. The mess continues.

My view may be naive but collecting all these assets into one large smelly pile doesn't make them go away. Yes, it will cool things off but too many financial institutions are hurting and new lending is probably immaterial at this point. But we can't overlook that balance sheet improvement will occur and that will matter at some point. And we can't overlook the potential that the Big Five - JPM, BAC, GS, MS, & C - have over everyone else. But there is much to worry about, too. Just how will the Feds manage these new assets. What other dangers lurk that will stress a bloated Fed? How bloated can bloated get?

The mess must be paid for and I wonder about how will this happen. Will taxes get raised to foot the bill and just how bad will it be? What if taxpayers revolt or demand an alternative. What if the Gov't sells off other assets it owns instead? Talk about reducing the size of Gov't. Imagine the cronyism on those deals.

The market is breaking down this morning but so far the inherent braking system of the bear is doing its job. The Fed is at it again with massive open market operations to add liquidity. Hooray but I can't imagine any good coming from all of this, especially in the short term. In fact, in the short term I don't understand why we aren't much lower. And I mean MUCH. I think that earnings are generally going to be horrible and when the street wakes up to that there will be some bad days. Realistically, the fact that we aren't much lower suggests that the street may be thinking that this could be much worse. Maybe the Govt's steps are working in that we are not falling apart. Its something to think about.

Stay tuned.

Another Thing...

Just checked out the major financial stocks as I do regularly. If the Government is restoring calm and order to the system today they are doing a poor job. Almost every major financial is down, most at new lows. Goldman Sachs is down 30% these past 2 weeks, Citibank about the same, AIG down over 90%, the list goes on. These are either screaming buys or another big name is close to failure. Curiously BAC and JPM have held up ok. More curiously, we haven't heard a word from Jamie Dimon. Is no news good news?
Prepare for the worst (Citi), hope for the best (we hold 1150).

Moment of Truth

Well here we are at 1160 after a sharp opening rally to 1184. They say the market rallied on news that the Fed was injecting massive amounts of liquidity into the system. They say that it was a coordinated efforts with other central banks. Why then are we back at the lows? I think we will break down (targets 1100 and the other i won't mention now) but bear markets are tricky. While they do go down like stones, they also face enormous efforts on the part of enormous market players to stem the tide. So bear markets have an inherent "braking" system in place.

But this is probably not an ordinary bear market. So all the pundits that say "well the average bear market drops 26% so we are there and..." don't realize what's really going on. I hate to sound like a broken record and maybe I am believing too much of my own you-know-what BUT, Bear Stearns, Fannie Mae, Freddie Mac, Lehman, Merrill, now AIG, who is next? all went bust in the last 6 months. Please reread that and think on that. Some questions come to mind...who will step in and replace these "providers of capital to our economy"? what will be the effect of tens of thousands (maybe hundred thousand plus) of unemployed secretaries, clerks, and m&a mba experts? Other than the US Governement (& taxpayers) why weren't there any other bidders for these storied companies? And just what is the Government going to do with all that bad paper and those bloated companies? It occurs to me that none of the answers bode well in the near term. I just do not see this turning out ok for a while.

Give the Government credit. They are taking steps to calm things, to buy time, so that order is restored. But I am concerned that

a: they are running out of "bullets"
and
b: they are now inexperienced custodians of very complicated companies.

Yes, in the long term this might work out but 3-5 years is a long way off. When the Fed is out of bullets I am sure the Government can take other steps but they can't be desirable alternatives. And if the economy weakens further from the decline in bank lending and lack of credit creation then that could put even more pressure on the economy.

What's an investor to do? I just don't see any reason to be long here other than a very small position or to trade a counter trend rally. I think we could go sharply lower with very little 'meaningful' risk to the upside. As I write this, yesterdays low's have been taken out. We are now 1150 and falling...what's the Fed's next move? Wow!

Our Capitalist System - RIP?

This AIG thing can't be good. The Govt stepped in to avoid the disaster of a violent unwind in the banking system. Firms in bad shape are essentially facing "margin" calls that have created a liquidity crisis. LEH, AIG, MER/BAC, et al, are in the center of the crisis. As they sell to meet their calls, prices fall furhter causing more "margin" calls placing further pressure. Other liquid assets must be sold to help the cause (in addition to non liquid assets). But those liquid assets may include things like stocks and that threatens prices. The break in the market occurred Monday, yesterday was likely a kneejerk sort of reaction, what they call a technical bounce. How low will it go? Today the pressure is on and we'll see if they hold. I just don't see how all this Govt bailout stuff makes the sun shine.

Regarding the S&P time spent under 1200 is bad. (now 1188, near the day's low) Everyone invested in the S&P/lookalikes over the last 3.5 years sees their positions at a loss. That will put pressure on any upside move. Eventually the supply will be absorbed but that is clearly a concern on top of the aforementioned concerns of a banking unwind. Meanwhile the Russell 2000 shows small caps holding 10% off the lows. This impresses me and if I were going long I would emphasize this sector of the market. Small caps would appear to have less overhead supply and pressure. In either case we must listen to what the market is telling us.

A major brokerage, perhaps Barclays, said the financial sector bottomed with the AIG bailout. Many have said similar things over the past 15 months in this sector and have been wrong. How do we know there aren't more "dead bodies"? Of course I will watch the sector to find future winners but this sector is a mess and other than reversion to the mean rallies I don't see strong enough evidence to support a bullish position on this group.

It's not a dull market.

Back from a long blog vacation...

What a long vacation that was! It happened but now I am back in the writing mode. So much has transpired since I last reported but suffice it to say the world is a different place today, at least as far as Wall Street is concerned. Several century-old firms with incredible history are now just history themselves. Who would have believed it?

The last post to this blog several months back noted all that had transpired leading up to the Bear Stearns implosion and JP Morgan Chase ‘takeunder’. I noted the potential for ups and downs in the market with the expectation of lower prices ahead. That is just what we saw happen. Along the way I have employed various techniques and tactics to profit from this volatility with limited success. While I am pleased to be ahead of the S&P this year I am displeased to be at a net loss. It’s very difficult to navigate these waters but it can be done. And I believe by the end of the year we will be in much better shape. Maybe all will all be fine with the Federal Government backstopping JP Morgan Chase, Fannie Mae, Freddie Mac, now AIG, and possibly more. While such moves buy time, they also just transfer the problem to another holder. Other than buying time what magic will be expected of the Feds? I’d like to see the sunny ending but I am having difficulty with that vision.

Backing up a few months, I noted that China as the new world leader with the amazing economy and soaring stock market would top with the Olympics. This is seemingly unrelated to the market but many major social phenomenon have coincided with market tops and bottoms. (Remember the Millennium celebration in the US and how the market topped with it?) I was wrong though – China topped well in advance of the Olympics. And to digress for a moment, with billions of people in China, couldn’t the authorities there find a little girl who is pretty AND can sing well?

As China topped, the broad global expansion lost some oomph. More oomph has been lost with the US and Europe slowing as well. Leave it to Wall Street to do the rest. It wasn’t good enough to lose money the old fashioned way – they found newer and better ways to lose money. The key to this banking crisis is the headwind that will work against overall growth as banks are more worried about staying in business rather than expanding their businesses. And if loan growth stays flat or shrinks, so will credit expansion, and so will economic growth. Until the dust settles on the latest LEH-AIG-MER implosion I believe we are best served with minimal exposure and a short bias at that.

There is always the risk that the market will make an explosive move upwards. However, with the unwinding of enormously leveraged balance sheets at the aforementioned firms (and probably others who are counter-party involved) we must respect the risk of a major decline. Yes, the horses may already be out of the barn as the market is down over 20% from its 2007 peak and has retraced 50% of the gains made from the 2002 lows. It’s possible that this is the time to be aggressively buying and not cautious. But with the risks out there I believe that it is better to be on the outside wishing we were in rather than being invested and wishing we weren’t. There will be opportunities and I will jump on them but for now we need some sanity and calm to return to the markets.

Stay tuned – it won’t be boring.