Thursday, March 13, 2008
hedge fund collapses pressure markets
fears of bear stearns also remain high, even though -- as barry ritholtz points out, and i agree -- the fed's recent move was intended completely to keep them and their hedge fund clients in the game at least for now. some are suggesting, however, it may have the opposite effect.
... it would be rational for the banks to take Carlyle’s assets and exchange them for top-quality, liquid US government bonds, rather than leave loans in place to a business, Carlyle, whose assets remained highly illiquid.
rational but terrifying. still, this may be the blood that wall street needs to see. it is further notable that the investment banks would not, under these circumstances, be liquidating portfolios but exchanging them for treasuries which would then be liquidated. with leverage liquidation pressure having reached all the way up the chain to agencies, including ginnie mae -- effectively the top -- there's nowhere left to go (except, of course, to increase the amplitude, which may yet be exactly what happens). but if the ibanks start instead converting portfolios into treasuries through the fed's new securities-laundering device, it would practically relieve that pressure -- and force a fairly massive rise in longer-dated treasury rates as ibanks short them for cash.
ken fisher is one of the best market callers on the net by the estimation of the very-rigorous cxo advisory (his detailed page), and i caught him on bloomberg yesterday saying what i'm trying to believe even though and indeed because it is hard -- this is the time, with outrageous fear everywhere, to get greedy. he sees the credit crunch fears as overblown -- particularly corporate balance sheet strength in the very largest caps and continuing credit flow to them at rates that, while spreads to rallying treasuries have widened, are broadly unmoved as positive for mega-cap indexes.
As I detailed last month, the market has shifted, as it did in the mid-1990s, into a period where the biggest stocks do best. We're in the first full correction of the new leg of the bull market. The Asian debt contagion then is the American debt contagion today. This debt crisis is, like the last one, a false alarm. By midyear we will awaken to an ever shrinking supply of equity and a growing economy. The market will be led by big companies.
and he's even positive about citi in spite of the long road ahead for financials.
It's going to take years for the financial sector to recover from its excesses, just as it took years for energy to recover from the 1980 collapse and for technology to recover from 2000. Still, I like Citigroup. The stock costs less than half of what it did last year. The market value of $129 billion looks high against earnings of $3 billion. But those earnings reflect the subprime writeoffs. These writeoffs have simply nothing to do with the underlying business. Take them out of the equation and you find Citi going for four times operating earnings. I think this is a $40 stock by mid-2009.
fisher has been too bullish, particularly on housing, if his forbes columns are to be believed. he has this aspect right, in my opinion, and agrees with bca research in that regard. but that doesn't alleviate the danger to housing -- even with no recession, no bank failures, no unemployment problem and the rest, house prices will continue crashing because normal lending standards are returning after a period of no standards at all which will not soon be repeated.
how to get financial intermediaries like commercial banks out of the woods that the housing repricing has lost them in is the $64,000 question. fisher is betting that there is an answer, and he may be right.