Another Bottom Call on Financials - this Time Even Before the Event Happens

These used car salesmen on Wall Street just never let up - this time they are calling for a bottom in financials even before the watershed moment arrives. Usually they at least wait for the event to happen before calling for the bottom - remember just weeks ago we had the bottom in because Merrill Lynch sold it's junk for 22 cents on the dollar, clearly creating a market clearing price for said junk - meaning we now could "price" everything and we're good from here [Jul 29: The Bottom is in Financials - Version 23,472] So now I guess this is "The Bottom is Financials - Version 23,473" Somewhere in the 10,000 range was the Bear Stearns bottom. Somewhere in the 5000 range was the "smart money overseas is buying Citigroup, so should you" [Nov 27: Citibank (C) Sells Stake to Abu Dhabi] etc etc.

• The eventual fates of mortgage giants Fannie Mae and Freddie Mac—along with Wall Street titan Lehman Brothers—could prove to be a watershed in the financial crisis and help restore confidence in the stock market, analysts say.
• The immediate impact of a collapse of any of the firms would likely create panic selling on Wall Street, these analysts believe. Yet it also could help convince investors that the worst had finally passed for the battered banking and housing markets, helping to bring a recovery in stocks and the economy.
• "One of the things that this market has been missing is a real panic," says Mike Larson, market analyst at Weiss Research's Money and Markets investment newsletter. "If we were to see an actual failure, a nationalization, some kind of take-under deal ... if we were to see something like that and we were to get some panic in the short term, in the long term that would be helpful to clear out those sellers that are left." (yes there was no panic in January 08 or March 08 or June 08)
• The seemingly inevitable move by the federal government to rescue Fannie-Freddie initially would shake the market. But once the dust clears and Fannie and Freddie can get back to lending again, that would likely be a catalyst to send the market higher. Combine that with a possible takeover of Lehman Brothers, which also could hurt shareholders, there would be greater clarity on Wall Street.
• "I suspect that this offers a tremendous buying opportunity for the markets," Michael Browne, portfolio manager for Sofaer Global Research, said on CNBC. "It's the sort of crash, the sort of failure that you see that tends to market bottoms." (I suspect eventually the squirrel will find a nut but I suspect I read those exact same words about 150 times the past year and I suspect if anyone listened to them they would of lost anywhere from 30% to 70% of their capital)
  

The Kool Aid is overwhelming.

Again it is very easy to sit there and call bottoms for the last year - especially if you don't run money. I keep asking where is the INSIDER buying by the banks themselves if they are so confident of things? Where are the huge CEO purchases (they have sucked the system of money so wouldn't it be nice if they showed some confidence and bought shares of the entities they know best?)? So "we" are to believe in the bottoms that the pundits scream at us about - when the executives who see what is on their balance sheet refuse to buy? Right.

Myself? I'm sticking with Meredith Whitney [Aug 4: Meredith Whitney Continues to be Negative on Financials (and Housing)] however this behavior really showcases the dependency of "free market capitalists" on government bailouts - it really is quite sick to watch and moral hazard has once again run amuck. But I certainly could see a "happy time" for market participants when the nanny state steps in - since they like to do their work on weekends, I'd say we have to be very careful holding excess short exposure going into weekends at this point because the euphoric buying that could ensue when mommy and daddy come to fix the problems greed and malfeasence created. It is hard to model "interference" and "socialism" on a spreadsheet. And then when THAT "high" wears off, we'll return to face reality (Alt A mortgages, option ARM mortgages, prime mortgages, credit cards, consumer loans, student loans, commercial loans) sometime later down the road. Until the next "bottom is in" event happens (some regional bank failure I assume). And we'll keep repeating this. For many quarters to come. And you'll be told - over and over - by the same folks mind you who told you the bottom was in August 2007 when the Federal Reserve first came to the rescue - that it's safe to get into the water.

Let me leave you with one comment from exactly 1 year ago:

“It is not the responsibility of the Federal Reserve — nor would it be appropriate — to protect lenders and investors from the consequences of their financial decisions.”

Who would say such a thing that turned out so vastly inaccurate? Who would say a thing that proved to be nothing but a joke - that was abandonded at the first signs the babies on Wall Street had turned their golden goose into an era of pain for all of us with their lack of regulation and utter greed. Why none other than Mr Ben Bernanke. That was almost 1 year ago to the day. How quickly the reality of "bail out nation" changed those thoughts.

• Since then, however, the Fed has cut interest rates seven times. It has helped to orchestrate the bailout of Bear Stearns, backed up by a $28.2 billion loan. And last month the Fed stood behind Fannie Mae and Freddie Mac, America’s two troubled mortgage giants.
• The chief conundrum posed by the coincidence of the credit crunch and the inflation crisis has been whether to cut interest rates to spur flagging growth or to raise them to keep a lid on rising prices. This is generally treated as a technical question. It is as much a philosophical one. Should greedy bankers and imprudent borrowers be bailed out for their excesses in order to safeguard short-term prosperity or should they be punished in order that they learn the error of their ways and behave more prudently in the future?

(As always much prefer to read these UK papers - because at least they say things that are politically incorrect unlike most of our media.

As for myself, it just makes me a bit physically ill to watch this all play out. But I guess the idea is to get it to a point that you become numb to it all. And we can look back in a few years and say "well it was all necessary - who could EVER imagine all these events happening at once - my gosh, what a once in 100 year event". And much like after the Enron/Worldcom era - we'll forget the lessons, and allow those with the deepest pockets and biggest political contributions relax the regulatory environment again - slowly but surely - and we'll repeat this "once in a lifetime event" with something new (although I cannot imagine how they will top this one) sometime in the 2015-2017 time frame. And repeat this all over again. With your money. Because the foxes do run the hen house in this country. And they get the money from the sheep; that's us! It's quite the farm. BAAAAAAH.