'The Worst Is Over for Financials' - Really?

Just as some were saying the worst was over for Wall Street, AIG (AIG), the world’s largest insurer, reported a $7.8 billion, or $3.09 per share, Q1 loss and reported it would raise $12.5 billion in the coming months. This is far worse than the 76 cents per share loss that analysts had expected and this news sparked fresh fears that the worst may not be over in the financial sector and pushed AIG’s shares down by over 8%.

European and Asian shares also fell on higher oil and worries about the financial sector, with companies like Allianz [ALV.DE] and HSBC [HSBA.L] feeling the ripple effect of AIG’s report. Even Morgan Stanley (MS) recommended selling shares in HSBC on capital concerns.

Not to let AIG steal the limelight, Citigroup (C) announced that it would be selling $400 billion of its $500 billion in “legacy” assets, prompting concern that the giant banking group may split up. Some investors however, think a breakup wouldn’t be such a bad idea as they think the group may be too big to manage and would be better off spun into individual, more manageable companies.

Driving away from the continued problems of Wall Street, Kirk Kerkorian is so optimistic about Ford (F) that he is running ads to announce that he is buying up to 5.6% of the company and may decide to buy more. He says that he is buying them as a vote of confidence in CEO Alan Mulally’s turnaround plan. Toyota (TM) on the other hand is concerned about the economic slump, saying that the higher gasoline prices and economic weakness will eat into its profit. Toyota has good reason for concern, especially since U.S. trade deficit narrowed more dramatically in March on a record plunge in the value of imports. Some of the imports that were affected were autos and auto parts.

Comments

[nScout:]

Besides the continuing nasty surprises from the Financials, beware of negatives coming from cash rich companies who have invested cash in now illiquid instruments.

2008 May 09 12:56 PM

[winslow:]

Want to see an end? Get the government to prosecute these CEO's and Boards for plundering assets. Sieze the assets of these individuals and return to the shareholders. Would that ever increase corporate governance!

2008 May 09 01:46 PM

[monday1929:]

As an ex-WallStreeter I fully agree- seize fraudulently obtained profits and bonuses. Prosecute Robert Rubin, crooked bankers, and corrupt rating agencies. Clean up the mess, stop pretending that we have "free market capitalism", help the unfortunate, and vote out ALL the corrupt Dempublicans.

2008 May 09 03:53 PM

[Eagle-Chief:]

Gracie - I cannot help but think that a total financial meltdown is a least a good possibility in the U.S. And after reading about a possible bailout of Fannie Mae & Freddie Mac in the future if the forclosure crisis worsens, I am quite concerned. This crisis is NOT OVER. Plus, the rising costs of food, gasoline, and other necessities is putting a huge strain on Americans. It is sad that our government is ready to BAILOUT financial institutions which were so incredibly reckless & greedy. There should be an uproar against our government bailing out those who ultimately are destroying America. Working families & the taxpayers will pay the price of their recklessness. Bailing out recklessness and greed will spawn more recklessness & more greed. This is not the free market system; this is ecomonic Socialism.

2008 May 09 04:19 PM

[wholesalecd:]

Yep, as were typing away our anger a CEO is out there somewhere on his yacht living the HIGH life even as his company loses billions. Our government prosecutes but also protects those with big money.

2008 May 09 04:49 PM

[who:]

Worst is not over but markets are desparately looking for signs of better conditions.

More layoffs will be experienced by the financial companies.

Another BSC - one of the retail financial companies will falter given person credit hasn't really kicked in "yet".

2008 May 09 05:02 PM

[DaveW:]

Grace,
Great to have a calm voice of reason within all the noise. Always like your posts, keep up the good work.

2008 May 09 07:23 PM

[hollowman:]

Perception is reality in the markets, and the markets still feel the worst in behind us. Up until April, AIG would have sent the market into a deep dive, and if oil would have made this a major melt-down. I think you could have easily seen this turn into a 4%+ down day with 90% down, and on extreme volume.

Today - decliners barely beat out advancers on the big board, and the indicies were off -.94 (Dow) to -.23% (Nasdaq) - oh, and the Rus 2K was green. As for the volume, let's just say I think people were out enjoy a day off from the looks of it.

I'm not saying things are hunky-dory, but I certainly wouldn't want to short this market.

2008 May 09 08:19 PM

[nevket240:]

Paulson MUST be prosecuted for his part in the derivatives boom. GS is a leading light in funnymoney schemes and has profited nicely in the mess they helped to create. Paulson was given the job he has by Bush as he knows the in/outs of what was put in place in the subprime/derivates fiasco. He is now manipulating the market by talking it up when he knows how fragile it really is. After all he didn't get to be head honcho at GS by being a good boy, he got there by being good at making funneymoney.

regards..

2008 May 10 06:00 AM

[Jen31:]

IMO, Financials have not hit the bottom yet, as in worse times like 1989 there were much more banks going bankrupt than now. U.S. banks' high marginal income and share price to book ratio indicate that there is still room for them to decline. However, optimists believe that by 2009 the situation with financials should get better, so probably it's time to start buying some shares or at least watching them.

2008 May 10 07:28 AM

[John Pseudonym:]

Jen 31,

I suggest staying away from financials until you see home prices at least hold steady for one solid quarter. That will indicate a possible bottom.

If you're a risk taker, buy at that point.

If you're a cautious investor, wait for home prices to increase in any way for a solid quarter. You will have missed the absolute bottom, by I never try to buy there anyway. I buy when the trend is obvious and stay in until the price spikes.

2008 May 10 11:43 AM

[Dan Schmeidler:]

I would hardly call this an article. But rather a short composition of various head-liners. Shame on you, Lazy-Grace (my nickname for you). Please don't ruin my "Seeking Alpha" experience with worthless articles.

2008 May 10 12:53 PM

[bill d:]

If anyone thinks it's bottomed they are whistling in the dark and peeing into the wind.
When we start sending people to jail the end may be in sight.

2008 May 10 12:59 PM

[bill d:]

To: your_avid_investor
I believe most of us like her articles.
Have a suggestion for you - on my screen it shows the article AND the author (the person who wrote the article). When you see her name - just don't put your little mouse thingy on that line and your Alpha experience will stay pleasurable.

2008 May 10 01:07 PM

[1machoduck:]

To: your_avid_investor
here's a unique concept for you......... rather than berate an incredible up and coming journalist.......
why don't you bless us with some of your original musings, with an enthusiatic and energetic article based on text instead of headline fodder..... so that we might enhance our "Seeking Alpha" experience.
just my two cents........

2008 May 10 02:38 PM

[alexd:]

Although I heard an interview with G.Cheng I have not had the pleasure to read her writing.

Avid : I think thee protest too loudly!

Last time I checked her article caused all the right buttons to be pressed. The one's that make me ask why, thats more than I get from most.

As far as the makrkets go, it comes down to what products and services is in demand and do not have any headwinds coming down on them and those areas that are overpriced and who are facing hurricanes. Bet on what is going up, short on what is going down. All the thinking in the world might get one in the right area but then we still have to know which way the wind is blowing.

Thanks Grace!

2008 May 10 03:02 PM

[dapperdan19:]

Whether the "worst" is over for housing and the credit markets is not all that important, imo. It implies a 'V' bottom for the crisis, which is what I believe the stock market is currently assuming. The question isn't whether the "worst" is over, but how long the "worst" stays with us.

One example, the way the Fannie Mae Automated Underwriting engines are set up, there is very little doubt that the maximum tightening in that Underwriting engine will occur during Q3 of this year, through September. So, if you're looking for the mortgage markets to ease up before then in the conforming market, I think you're dreaming.

On the positive side, we are seeing spreads tighten between the 10 year treasury and 30 year FNMA. Also, we're seeing Jumbos being priced much more attractively. The credit markets are improving, incrementally.

Also, as far as bank stocks are concerned, they've all become commoditized. Compare the rate sheets today versus, say, 15 to 18 months ago. 15-18 months ago, a typical mortgage lender (I'm looking at an old MortgageIT rate sheet) was 9 pages. Today, it is 4 pages, and page 1 is a directory of the entire company. There is no value-added remaining in bank stocks. When every bank pushes to become a Hudson, there are no margins left. The value of Hudson was that it was Hudson when most of the other banks were trying to be a WAMU, Countrywide,Indymac.

2008 May 10 07:32 PM

[Jase:]

This is laughable. Look, the financial sector has already recovered. That said, it has sprung back a little quick, so I'm of the opinion that the markets will be heading lower again starting this week--we'll go back and test those March lows, but we certainly won't break them. I remind you that this is healthy, and normal, and expected. Let me go out on a limb and provide what I believe to be rare these days: a actual quantitative prediction. Take a look at UYG, it's a fairly decent snapshot of the overall health of the financial sector right now. It will trend lower to about $27, but that's it. That's the bottom. That's the lowest price you'll see for the rest of 2008. Buy the financial sector up hand over fist once we're there. Like prostate health, if your financials are healthy, everything else follows.

2008 May 10 09:43 PM

[Dwane:]

First the value of property must find an equallibrium. I remember the telecom mess and the problems were always one quarter away from being "fixed". Banks will a good place to go only when we have property values fairly set. Until then banks can only water themselves down (issue more shares) just to keep from Chapter 11.

2008 May 11 02:00 AM

[Lonetrekker:]

I am in the real estate field for many years, I have not experenced a worth market as today's. The problem is not that buyers are not in the market, rather they can't get loans. The lenders have tighten up the standrad to a point that very few people who can actually get the loans. Banks are looking at borrowers credits, but more and more, they are scrutinizing the properties. If they see something in the property that they did not like, they simply turn the loan down. As long as the lenders are lending money, the real estate market is not going to turn around.

2008 May 11 04:21 AM

[cat & mouse:]

Starting to say that I may be wrong in my thinking, it is well nigh impossible under the present adminstration, to persecute the CEOS of all losing companies, as the FED is backing them sky high. It is nothing but a pipe dream!

The FED IS GIVING THE INVESTMENT BANKS AND THEIR ASSOCIATED TRADERS, THE MOOLA IN THE FORM OF 150 BILLION LOANS FOR ONE MONTH, AND THIS IS REPEATED OVER AND OVER AGAIN, TAKING THEIR LOSS MAKING DERIVATIVES AS COLLATERAL. The gold standard has been withdrawn so that note printing is so easy.

When the oil goes up you expect the DOW to go down, but somedays it goes up on flimsy news to my consternation! That is when investors lose their money.

The investment banks and traders use the 150 billion loan to prop up or down the DOW components as a team in the most unexpected illogical way, and foolishly all the stocks follow the DOW almost verbatim after a few minutes. So the investment banks and associated traders make a kill on the stocks, as they kinow when they will go up or down against normal logic, and the poor investorsd become usual suckers. It is a pity, as this phenomena is repeated over and over agin sucking the investors money, and the banks and traders priofit enormously to wipe their loans. This way, one day they will have no loss making derivatives in the near future, at the expense of the small hedge funds, pension funds and other investor companies.

Please read Paul Begala comments on the elections. I think that he says that the democrats will lose, as the egg heads and afro-americans are backing the wrong horse. I think this makes McCain as the winner and the policies of the present adminstration will continue and the CEOS of the losing companies will flourish to the anger of the investors. I think all the outbursts are futile, as the present adminstration is unshakeable and will continue to the consternation of all the commentators!

2008 May 11 01:38 PM