August 3, 2008
Privatizing Profits, Socializing Losses
Interview with Nouriel Roubini:
“[The government is now] bailing out troubled participants and intervening in every market. The Securities and Exchange Commission has accused others of trying to manipulate stocks, but the government itself is now the manipulator. The regulators should investigate themselves for bailing out Fannie Mae (FNM) and Freddie Mac (FRE), the creditors of Bear Stearns and the financial system with new lending facilities. They have swapped U.S. Treasury bonds for toxic securities….
[T]here are ways to manage [the failure of] Bear or Fannie and Freddie in a fairer way. If public money is to be put at stake, first all the shareholders of these companies have to be wiped out. Management has to be wiped out, and the creditors of Bear should have taken a hit. Why did the Fed buy $29 billion of the most toxic securities, and essentially bail out JPMorgan Chase (JPM), which bought Bear Stearns?
The government bailed out everyone. Even the unsecured creditors of Fannie and Freddie should have taken a hit. Sometimes it is necessary to use public money to rescue institutions, but you do it in a way in which you’re not bailing out those who made the mistakes. In each one of these episodes the government bailed out the shareholders, the bondholders and to some degree, management.”
Will Roubini overstay his “being right” about the financial sector? I looked through the charts of hundreds of financial stocks this weekend and thought to myself, maybe the worst is past. He says it’s “the second inning of a severe, protracted recession,” which may be true, but has the market already discounted that? Maybe.
Look at Wells Fargo’s (WFC) chart: it’s trading less than 10% below its August 2007 lows… Old National Bank is another one… I could make a long list.
August 4th, 2008 at 12:18 am
Nice recovery but the price just hit a confluence of about every technical resistance there is, a 50 day dropping below a 200 day, the former Aug 2007 support, and falling highs trendline. But,if WFC broke thru this mess, I would definitely sell my SKF! :-)
August 4th, 2008 at 4:27 am
CM said:
“but has the market already discounted that ? Maybe.”
“I could make a long list.”
Your readers know that you love lists, and that you like to invest long term on the cheap.
What is it that they say about knife catchers ?
Now is not the time to be bold. It’s time to sit back and watch it all unfold; wait for more disclosure and let things settle a bit. It will happen in time.
Patience. The time to buy that sector will certainly reappear, but now is not the time, IMO.
Just my opinion, as always.
August 4th, 2008 at 5:59 am
Where’ the List, CM. :)
August 4th, 2008 at 7:37 am
@BL: The list is composed of most of the ones on here. :)
August 4th, 2008 at 9:42 am
Roubini is correct about it only being 2nd innning, and he’s not the typical “cheerleader” so has nothing to do with “overstaying” — long long long way to go on the downside… primary secular bear market… in my opinion, this market is so out of touch from reality with its neverending perma-bull ultra-bullish forever optimistic outlook… and why “discounted” is perhaps the last word in the entire English language that has application here…
August 4th, 2008 at 9:47 am
v838: Time will tell. I’ll be impressed if the financials do collapse (again) and then sometime in the future Roubini comes out and says “the worst is past” and he does happen to call the bottom — I’m interested in when he calls the ninth inning.
It’s easier now in the internet age to go back and point out the people who got it right until they got it wrong.
August 5th, 2008 at 1:13 am
We’ve had a bull market from 2003 to 2007. Given the size of the mortgage credit issue, does it make sense that the bear market is only going to last 1 year? I sense we are in a multi-year bear market.
August 5th, 2008 at 7:08 am
Lawrence: The market is a discounting mechanism and as far as the financials go, many have already dropped 75%+ (massive bear market) and I don’t see many of them falling further (though I could be wrong… again).
August 5th, 2008 at 9:32 am
Roubini’s analysis is right on but I actually think Soros spelled it out in clearer terms in his most recent book. World is at the end of 30 year credit bubble (what he calls “the super bubble.”) The debt deflation cycle should bankrupt many if not most of the banks.
If financials had a 22% weighting in 2006 in S&P 500, why can’t they have a 5% weighting in 2012 after the long deleveraging cycle completes? Financials are currently at 15.52% - perhaps on their merry way to 5%. Energy as sector has increased in value as percentage of index from 6% in 2002 to 14.11% presently. Maybe on its way to reclaim its former 1980 glory of 27% of S&P 500 sector weighting.
What could slow or change the economic trends in place? Major and coordinated government intervention to prop up the banking sector. We have seen some significant bailout measures so far, but more will be coming.
BTW - anyone want to guess Financials’ sector weighting as % of index back in 1980? Try 4.5%. We have a long way to go baby.
August 5th, 2008 at 11:10 am
The world maybe ending soon but many Financial charts show a tradeable capitulation bottom. XHB and select components of XHB as well. Humongous volume on long tailed candles and still trading in the upper range of those candles, not giving anything back.
Back when you were talking about WM in the $30’s, i commented that we should wait till we put a bottom and start moving up in a new uptrend.
Well, A bottom is in. I believe it is THE bottom in financials, but even if not, you have the exact stop level on the chart and a precisely defined risk (barring a gap down). I am looking to buy into MER and maybe a home builder in the not too distant future.