March 24, 2008 TCM Observations
What a difference a week makes. On Sunday March 16th 2008, there was a very real possibility that the global Capital Markets was simply going to fall apart and the distrust that investors felt for Bear Stearns would quickly spread to the other major investment banks and global commercial banks with primary dealer operations. The initial JPMorgan deal to acquire Bear Stearns and utilize $30 billion of financing from the New York Federal Reserve Bank seem to halt the rush of institutional investors for the proverbial doors. Yet last Monday the fears of just which firm might be next caused many financial stocks to trade to multi-week and in many cases, multi-year lows. Lehman Brothers, for instance, traded down from the previous Friday's close of $39 per share to a low of $20.25. Yet today as Lars Toomre writes this, the Lehman Brothers common equity is trading around $47.25. There are similar stories with many other financial stocks, like FNMA and Freddie Mac.
The key question of the day: Does this mean that the downdraft in financial shares is now near the end? Are the credit markets close to their lows? Toomre Capital Markets LLC ("TCM") suspects that the answer to both of these questions is "No!!" This relief rally in stocks, the broad sell-off in commodities, the back up in Treasury securities relative to "spread" fixed-income products and the flow of funds from cash to various longer-term investments all will get the markets to a more even keel. The shorts will not be as excessive and shortly the market sentiment is likely to turn to a more neutral reading. All this means that there will be more room to the downside as negative news continues to develop about the downturn in the American real estate market and what its repercussions will be across the financial spectrum. Perhaps this prospective view will be wrong. However, the excesses of the housing bubble and credit crisis are not likely to be corrected in just six or nine months! Astute readers might recall the TCM post from last November entitled Jim Rogers: Six More Hard Years of Subprime Fallout...