The Worst Is Over ... Again ... And Again ... 18 comments
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Investment banks might have CIPA.
Congenital Insensitivity to Pain with Anhidrosis, or CIPA, is a genetic condition that stops its subjects from feeling pain. In laymen's terms, the subject's body cannot communicate "pain" signals to his or her brain. It's an extremely rare phenomenon, afflicting only 17 people in the US.
Yet, as rare as this condition is for individuals, investment banks seem to have it in spades. In the last month, corporate heads at Goldman Sachs (GS), Lehman Brothers (LEH), and Morgan Stanley (MS) have all come out saying "the worst is over" for the financial crisis. As with CIPA, these corporate heads don't seem to be receiving "pain" signals from their corporate bodies.
On April 8th, Morgan Stanley's CEO John Mack announced that we are in "maybe the top of the ninth," regarding the subprime credit collapse. Yet, a mere three weeks later, Morgan Stanley analysts— the guys who actually study the markets—published a report telling clients to "sell the rally" in financial stocks. They added, "we think we are only in the third inning of the credit cycle and expect this cycle to be worse that (the slump) in 1990-91."
Morgan Stanley isn't alone with this affliction. Lehman Brothers' CEO Richard Fuld announced that "the worst is over" a mere couple of weeks after Lehman analysts cut their estimates for banks in 1Q08. Merrill Lynch's (MER) CEO joined the "worst is over" crowd a mere month before his firm wrote down another $6 billion and announced it would be cutting 4,000 jobs.
Genetic conditions aside, these guys haven't got a clue how bad things are going to be. They're salesmen, not market forecasters. If you don't believe me, have look at their recent forecasts going back to the beginning of the financial crisis. Last July, investment banks estimated losses from subprime mortgages would total $100 billion. Within a month it had quickly doubled to $200 billion. By November estimates had risen to $400 billion. Now, even Goldman Sachs has posited $1 trillion.
It's amazing to me that investors take what investment bank CEOs say seriously, even though they've been spectacularly wrong for most of the financial crisis. It's even more incredible when you consider that these guys are risking nothing making these claims. After all, if they're wrong and things get catastrophic, they'll cash out with severance packages worth hundreds of millions of dollars— just like Chuck Prince and Stan O' Neal. Yet investors are buying it just as they have numerous times in the past.
Since the financial crisis started last July, financial stocks have staged 12 rallies of 5% or more. Every time, investors bought thinking the worst was over. And every time, the sector plunged again. Altogether, it's down 28% since that time.
Folks, the worst will be behind us when CEOs are no longer saying these kinds of things; when rallies are viewed with suspicion instead of enthusiastic exclamations that the bull market is back on track; when fund managers are genuinely bearish— a recent Barron's survey showed 87% of fund managers expect to be net buyers over the next three to six months— THEN the worst will be over.
Until then, any exclamation of "worst" is just wishful thinking. And while the heads of these organizations may not feel any pain, their bodies are bracing for more trouble. For those of us who won't make millions from getting it wrong, I suggest selling financials into this latest rally. You'll be glad you did in the coming months.
Disclosure: No positions.
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This article has 18 comments:
Just doing some back of the envelope calculations here.
2 million subprime loans at an average of 300,000 / loan yields a total of 600 billion dollars at risk. (Maybe 2 million is a little low given a annual housing sale rate of 5 to 6 million.)
For estimating purposes here say the mortgage holders suffer a 33% drop in the value of property. Mortgage holders forced to sell the property at 200,000. Total loss = 200 billion dollars. Even if there were 4 million subprime loans (which could be reasonable) the total loss = 400 billion dollars.
However, the only way I can stretch to 1 trillion dollars is to take into consideration all mortgages, not just subprime. So to say that the subprime mortgage crisis will cause 1 trillion in losses is a wild overestimation.
However I could see that the housing bubble (not just subprime mortgages) could cause a loss of 1 trillion. Not catastrophic given there are 100 million households.
Market forecasters are about as useful as used toilet paper and no more accurate than rolling the dice repeatedly.
Oh look... companies keep reporting better than expected earnnings, according to the offical formula we haven't even had a single quarter of negative growth let alone the called for two in a row.
Now Baji, I don't know what you're smoking but it must be high quality something. You claim 2 million subprime loans outstanding at an average of 300,000 / loan yields a total of 600 billion dollars at risk. I don't know where you got your figures or if that's the total outstanding subprime or just was is expected to go sour. If the former you didn't say so. I would hope you're not that gloomy if you think everyone will stop paying their mortgage which obviously would be crazy to think.
Memo to Seeking Alpha, maybe you should consider requiring drug testing before letting anyboy spew their poison with the usual undocumented garbage. I mean I'm a season old crusty investor that pays no attention to yahoos like seen here but somebody new to investing may take the short sellers seriously.
In reference to the preceding post, the author does not take into account the massive pyramid of leverage built on mortgage securitization, nor the knock-on effects on the overall US and global economy in his assessment of the total losses from the housing bust. However I do applaud his effort to put some of the rhetoric out there into numerical perspective.
great article sir, i salute you. turn off CNBC too, they are just paid of salesemen (ie. see ambak 3:30pm pumping three times by gasperino resulting in 300 down moves up, on the back of 'bailout' er i mean 'dilution'
If SeekingAlpha is going to have a test before letting people post, they should test to make sure people aren't nasty, abusive twits like Negative Carry and Voice of Reason.
But were are not done yet lets add the Commercial real-estate which is very bloated on its own and many new buildings are standing empty.
Add a little spice with the leveraged takeovers where management got huge bonuses for a lemon deal. But what the hell let the bank eat it.
A pinch of defaulted car loans and the real secret ingredient of commercial loans over bloated for when the times were good.
As icing on the cake are the credit cards defaults as the economy melts down and people pay their mortgages with them.
Stir vigorously with all time high oil prices, only the best inflation adjusted, to add thickness to the stew.
AND we serve with no savings on the side the dish best served cold Cream LA DEPRESSION.
Bona appetite
Great post, gaucho...*s*.
jan