January 21, 2009

Global Market Comments for January 21, 2009
Featured Trades: ($BKX), (BAC), (WFC), (JPM), (PWR), (C)

1) The final numbers are in. The S&P 500 fell 42%, from 1,400 to 810, during the eight years of the Bush administration. The dollar fell 41% against the euro, from $0.92 to $1.30. A European investing in US stocks lost 59% of his capital, while a Japanese lost 56%. One can imagine how the Chinese feel about the $1.2 trillion of US bonds they bought, which have dropped in value by half.  America became one of the greatest short plays of all time. It became the no brainer 'fall of the Roman Empire' trade. Is it now time to cover your shorts?

SPXLongTerm.png picture by sbronte

2) If you had any doubt about who is taking the big hit in this leg down, take a look at the Philadelphia Bank Index ($BKX), which has gone back into free fall since the beginning of the year. Even banks thought healthy only weeks ago are taking swan dives, with Bank of America (BAC) plunging 65%, Wells Fargo (WFC) shaving 56%, and JP Morgan (JPM) evaporating 45%, in just three weeks. We may see all major bank common owners effectively wiped out before this ends, as Citicorp (C) has already done. These classic widow and orphan stocks are some of the most widely held investments in the country, and the impact on pension fund and mutual fund holders will be huge.

BankIndex.png picture by sbronte

3) Next time you hire a new fund manager, look carefully when you shake hands.  Scientists in England have discovered that the most successful securities traders have a ring finger that is substantially longer than their index finger. And I can tell you from experience that this digital layout plays hell with yur typing akkuracy. Really!

4) FDR saw a 75% gain in the Dow during his first 100 days in office. Don't expect the same from Obama. The deck is too stacked against him.

5) FDIC chairman Sheila Bair is one of the few holdovers from the Bush administration, and the last one in his team that had any credibility. She is forcefully arguing in favor of an 'aggregator bank', or a 'bad bank', which will buy toxic assets from the banks. This is what the Resolution trust Corp. did during the S&L bailout, and it worked. This was what congress thought it was voting for with its passage of the TARP, before former Treasury Secretary Paulson perverted it into a selective, case by case, bail out of his past and future clients. Treasury bailed on asset purchases once it figured out what a can of worms it was getting into. Another alternative is to leave the troubled assets on bank balance sheets, but insure them all. There are hundreds of billions of dollars worth of private equity that will happily buy this paper once a real price is set. The problem is that no one will make a 10 cent bid, only to see half their equity wiped out by a follow up bid of only 5 cents. A government backed institution that creates a two may market for this stuff would solve that problem. By the way, the first steely nerved round of buyers of bad Japanese loans in the early nineties at 5 cents on the dollar made huge fortunes reselling them to the next line of distressed asset buyers at 20 and 30 cents. Expect the same thing to happen here. The pathfinders and pioneers will make the big bucks.