Waiting for Financials' Other Shoe to Drop

I’m rushing for a 10:00am meeting, so I don’t have time to think much about markets this morning. I will leave you with the thought that I do anticipate another shoe to drop at Humungous Bank & Broker (HB&B). With foreclosures of homes at all-time record highs, the special loans groups at HB&B are working overtime.

What this means is that the bank’s capital must be protected ahead of any client. Why else do you see a Lehman (LEH) ready to sell off their profitable Neuberger division, or a SunTrust Bank (STI) of Atlanta selling off their original holdings of Coca-Cola (KO), or Merrill (MER) selling a big piece of Bloomberg?

Does anybody really think these decisions are being made lightly? The banks are toast unless they can wait the economy downturn through to where housing prices improve and their asset-backed mortgage holdings take on higher valuations.

The issues there are probably 40% worked out. If HB&B was to collectively write-off these dubious holdings today, the industry would lose many of its key players. I still think there is a likelihood of that happening, so it is advisable to continue to avoid the Financials (banks, broker-dealers and insurance companies).

Is there a play yet for the commodities? I don’t think so. Demand destruction is occurring world-wide. But, if, as and when there are major shake-outs like what happened last week and Monday, the larger and longer-term oriented accounts will buy those dips. That will lead to short-covering, and modestly higher prices in the very short-term. Then reality will set in again, and prices will continue to fall.

At the cycle bottom, I anticipate the $WTIC crude oil price to hit or exceed a low of $85/bbl. We still have a way to go. So, I’m not rushing into gold at this point, but I am watching the Toronto Venture Board companies (for more than short-covering) and the $USD:GLD linkage as well as other commodity prices, and the prices of the major miners (Xstrata (XSRAF.PK), BHP (BHP), Rio Tinto (RTP), CVRD (RIO), Teck (TCK)).

I think we’ll see a significant buying opportunity for precious metals and oil before the end of the calendar year.

Comments

[David Braun...:]

You are right on! I'm avoiding financials too, and most retailers except liquor and beverages. The Fed is injecting massive liquidity into the system, but it's pushing on a string. No one want to make loans in this environment. Remember, housing and construction got us out of the tech bubble. With those pillars broken, I expect to see new lows in the markets below the 1999-2000 lows before we see the bottom. My guess is that we may see new highs in about 10 to 12 years. Oil prices will trade between $80-$120 during that time. The problem will be deflation, not inflation as the rest of the world lowers their interest rates while ours stays steady. The USD should rebound to 1.15 to the Euro over that time period. Many banks will likely fail. Unemployment could reach 7%. But in the end, the U.S. economy will eventually strenghen and recover. This is not Armagedden, but it will feel like it for quite a while.

2008 Aug 15 09:51 AM

[Brahm:]

Bill Chara is an astute observer/commentator without the usual verbosity that often comes with analysis provided by many. The other shoe is yet to fall, and understandably a few others before the burdens are fully removed from the financial sector and the economy. Financial companies do not usuallydispose off their crown jewels when markets are limp. And, as has often been observed off and on crown jewels of a diverse nature and in diverse sectors.

2008 Aug 15 11:19 AM

[Stone Fox C...:]

Without US financials coming back, we won't see any reason to buy oil and commodity stocks. Demand destruction will continue to grow. While foreclosures may be at high rates, loans entering the default process (30-90 days late) are starting to slow down. The hysteria over foreclosures seems to be overblown. New loans aren't entering the process so if anything things are getting better and not worse as the general media seems to act. I've yet to see any facts proving that new foreclosures will get worst and exceed the reserves already taken by banks.

2008 Aug 20 03:53 PM