Financial Stocks are in Free Fall
Nov 19, 2008
Posted by admin | Filed under Uncategorized
Even for someone like myself who has been generally negative on the equity markets, this weeks’ action has been downright frightening. The financial stocks have been collapsing. Citicorp has gone from almost 10 to below 7. Goldman Sachs has lost about 10 points. GE and Goldman Sachs are hitting new lows. Even the supposedly “safe” banks like Bank of America, Wells Fargo and JP Morgan Chase are being hit with very strong selloffs. The scary part is that the selling does not appear to abate at any point. Although experience tells me that all the banks can’t possibly go under, the trading action on them shows no real buying support at any level. In my position, I speak to many people on Wall Street. The average broker or financial advisor I speak to was paralyzed 1 month ago. Today, speaking to them is like speaking to a zombie. Their minds don’t seem to comprehend the prices on their computer screens. As I stated last week, although it seems like a sign of capitulation (when almost everyone is extremely negative), the rallies don’t last very long, and are met with further selling almost immediately. I have no idea where the bottom is.
In other news, the auto makers are continuing their pitch on Capital Hill to get emergency loans. They are claiming that if they don’t receive cash immediately, they are all facing a possible Chapter 7 bankruptcy, and millions will lose their jobs. The only funny (and tragic) part of the hearing for me is when despite the CEOs pleadings, they all admitted that they had flown to Washington on their private corporate jets. Unreal.
Remember Warren Buffet and his famous bets on GE and Goldman Sachs? Well, not only have these stocks declined precipitously since he made his investments (although he does own preferred shares not offered to the average investor) but apparently his company may have problems. The credit default swaps (CDS) on Berkshire (which has lost over 25% in stock value the last 30 days) have soared. These CDS indicate that the risk in his company has increased dramatically. These CDS, which were at around 100 basis points in September, are now around 415. At that level, they are indicating a credit rating that is only slightly above junk for Berkshire. What happened? Well, apparently Berkshire Hathaway has sold contracts to undisclosed buyers that will protect the buyers against stock declines. According to Bloomberg.com, Berkshire may be on the hook for as much as $37 billion starting in 2019. As the markets have declined, Berkshire has already been forced to write down $6.7 billion.
Finally, Howard Silverblatt from Standard and Poor’s reports that only 16 of the S & P 500 are up for the year, according to the NY Times Floyd Norris. He points out that about 200 stocks have lost at least half their value this year.
November 20th, 2008 at 12:11 am
The only thing that concerns a smart investor is ‘growth’. In the stock market, the share prices and the respective company’s worth are directly proportional to each other. The investor should therefore always go for companies that are constantly rising in worth.
November 20th, 2008 at 5:04 am
Once there was an economy in which people bought what they required, flour, meat, ale. Then there was an economy in which highly paid marketing personnel thrust advertising resources into persuading us to buy items for which our requirements were strictly limited, like purple-and-green turtle shaped toddlers’ paddling pools. Now we have a planet - unless we believe ourselves to be mysteriously cleverer at climate science than those who actually study the topic - in rapid terminal decline. Yet economists still speak longingly of Perpetual Growth as if it did not come out of the same sack as the engineer’s dream of Perpetual Motion. Perhaps, with luck, some of us will survive the starvation to come, and the species won’t become extinct. But I expect all the other species rather hope we will indeed become extinct.
November 21st, 2008 at 12:52 pm
It is very clear to me that the world has changed. Most people have not yet caught on to this. Despite opinions to the contrary, it was not decreed in heaven that housing and equity prices must always go up!