Not Everyone Is In Trouble

Last Monday we thought the credit crunch had reached its peak with the US government nationalization of Fannie Mae (FNM) and Freddie Mac (FRE). It now appears that this was just the prelude. There were those who predicted when this crisis first broke, that it would not blow over without at least one financial giant disappearing from the map, and Monday's turmoil saw the demise of not one giant, but two. Yet the crisis still seems far from over. Just as all eyes were trained squarely on the disintegration of Lehman Brothers Holdings Inc. (LEH), investors suddenly found themselves facing another bombshell from a different direction.

One of Wall Street's most prominent symbols in the last hundred years, the raging bull of Merrill Lynch & Co. (MER), born in 1914, lost its independence and will soon be swallowed up by the mighty Bank of America Corporation (BAC), after taking a resounding beating from the bears. The bank was sold at a price reached a week earlier, but , like the bull rings in Spain, the matadors on Wall Street - in this case short traders - kept stabbing the Merrill bull with their bayonets until it finally collapsed Monday.

Just as the high-tech world found itself engulfed by a tsunami of sorts after the insanity of the bubble period and is now in a totally different place, so too the banking system is now experiencing an earthquake as the result of the unfettered greed, whose guiding principle was leveraging other people's money as much as possible. Today, leveraged shells are collapsing one after the other burying the people who built them and sometimes, the shells themselves as well. Once this process has run its course, the system will be much stronger and healthier, like the cash-laden, radiantly healthy technology companies of today, which, if they wanted, could bail out any troubled bank they choose all on their own.

It is somewhat sad to observe Lehman Brothers, which accurately predicted that oil prices would fall to two digit figures, now having to file for bankruptcy protection, while Goldman Sachs (GS), which got it wrong and remained steadfast in its expectation of a price of $147 a barrel by the end of the year, continues to thrive.

The view from China

With uncertainty now at a level the likes of which we have not seen since the days of the tech stock bubble, I contacted an Israeli friend now active on the global capital market in Shanghai in China, and asked him how the turmoil in Wall Street looked from the East. Zachi Schor is studying towards a master's degree over there in an international business administration program under the auspices of the China Europe International Business School, and has worked at the investment department of China's second largest insurer, Ping An, which manages a total of $100 billion in assets.

Schor is unrelentingly optimistic about the US economy, and he also does not believe we are about to witness the demise of the US banking sector, about which he has first hand knowledge from his days as an employee at the late lamented Bear Stearns (BSC). He drew my attention to the stocks of US banks and brokers that we haven't been hearing about during the current tempest, since the media, quite rightly, are looking for "blood on the floor", while the stocks to which he refers are cruising very close to their full-year highs.

Two notable examples are the brokers of the online era, Charles Schwab Inc. (SCHW), and TD Ameritrade Holding Corporation (AMTD), which did not get embroiled in failed sub-prime investments, as did the third sector leader E*Trade Financial Corp. (ETFC). The first was traded on Friday at a price slightly higher than that of Merrill Lynch, and the second was traded at a market cap five times that of Lehman Brothers before it declared itself bankrupt. Schor believes that once the market rallies, and the general public return en masse to the stock market, the online broker stocks will be the big winners.

Schor believes that the demise of some of the big banks that were headquartered in New York will bring about a migration of the US financial district to the West Coast, which, among other things, is closer to the emerging markets in the East. He expects the West Coast to attract a big wave of business and tourism from China and other countries in the region in the future. He drew my attention to the stock of UnionBanCal Corp. (UB), a regional bank headquartered in San Francisco which, like the stocks of the two aforementioned brokers, is also trading close to its annual high, $75, as if there was no bank crisis.

Schor also believes very strongly in the economy of the state of Hawaii, which in his view, stands to gain because of its location between the rapidly developing Asia Pacific region and the US West Coast. He sees two interesting investments there - a bank headquartered in Hawaii, and an airline with surprisingly strong results. One, Bank of Hawaii Corporation (BOH) is currently being traded at its 52-week high, and the other, Hawaiian Holdings Inc. (HA) is one the few airlines worldwide that are making a profit despite soaring fuel prices, which is why its share price too is close to its annual high.

Beware of the earnings downgrades

The next three weeks, which will bring the third quarter to a close and set in motion the summing up of the quarter as a whole, are likely to see the release of a good many earnings warnings. Since mid-August, meaning within one month, the Nasdaq has fallen more than 8%, part of which can be attributed to the tidal wave sweeping through the banking sector and the rest to the overall fear of a global recession that could also hit demand in the technology sectors.

The first two quarters of the year bore no signs of a sharp decline in the sales and earnings of the top companies, and most analysts are confident that it will happen this time around, which is why reports of downgraded forecasts are almost a daily occurrence. For example, Goldman Sachs just recently lowered its forecast for the entire chip sector through the end of 2009, even though they expect a turnaround as early as the beginning of next year.

I believe that the fact that there is no catastrophe in the tech sector will be clearly demonstrated this week, with the unveiling of results by two of the software industry's giants- Adobe (ADBE), followed on Thursday by Oracle Corp. (ORCL).  Oracle will report earnings per share of $0.27, and full-year growth of almost 20% with its share price now down to a multiple of 11 on 2009 earnings. The market has set a high target for Oracle, which it expects to issue earnings guidance of $0.35 for the next quarter.

Disclosure: None

Published originally by Globes [online], Israel business news - www.globes.co.il

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on SeekingAlpha with full permission.

Comments

[Did U Think...:]

I think you do not have a clue how bad this market is going to melt down. We are not just seeing a couple of neighborhood banks in trouble here. We are seeing 100 and 150 yr old institutions go tits up like it was nothing. And they don't just have a few tens of billions of assets to liquidate. Just AIG and LEH alone have 1.6 trillion worth of assets to sell quickly. That means prices on everything will go down which means by Q1 2009 the banks which are left will be marking their assets down fare enough so as to threaten breakage of collateral covenants.

By the time this is all played out in 2-3 year people will hate bankers and the stock market like poision.

2008 Sep 17 06:18 AM

[deee:]

Do you not thing people already hate bankers. They have always been like car salesmen. There to screw you out of your money. I just watched an new car dealership in my community grand opening state of the art building worth over several million dollars, and the auto companies are in trouble. Where do you think the money came from to put up such buildings.

2008 Sep 17 08:05 AM

[investor88:]

"Did you think the Ponzi Scheme would last" has given useful comments, direct and forceful. Wow we nearly forget that there is now usd1.6trillion of assets to be unwound onto the fragile markets, imagine the depressing effects. He talks about the unwinding being completed in 2 to 3 years, this seems a long time but such a time span or even LONGER may be needed to correct 2 decades of debt binge. Then Greenspan and quite a few others talk about this recession rivalling the 1930s in intensity. James Saft of Reuters says deflation is on the agenda. All in all a time to be cautious and preserving capital for better opportunities.

2008 Sep 17 08:45 AM

[tipalia:]

GS continues to thrive? Are you sure? Everything that shines is not gold.

2008 Sep 17 10:57 AM

[fastcad:]

This market is in meltdown. Low Intrest Real Estate loans have fixed high prices in the US real estate market. Way beyond its true falue.

2008 Sep 17 11:47 AM

[LifeSentence:]

"people will hate bankers and the stock market like poision."

???

In the most magnificently capitalist society the world has ever known, the notion that people will hate making money is pure and unadulterated lunacy. Sure, they'll lick their financial wounds by moving their money into t-bonds or deposit accounts. But everyone always comes back home to the place where the diligent investor can make real money. Stock market forever!!!

To the original author: thank you for your article. I enjoyed the macro-level take on business migration. Although I think many firms will always have a presence on Wall Street, I think the take that many of them may be moving is accurate. Particularly since many of them already are moving parts of their operations to other locales. Even the firm synonymous with Wall Street (Goldman Sachs) has already left the street in large part. First having moved to their new office across the river in Jersey, and now with plans to move a lot of their operations to their offices in the west.

2008 Sep 17 01:33 PM

[notsosmart:]

they should all move to vegas.this is just one big casino exept the rich losers are are bailed by the dumb taxpayers.

2008 Sep 17 02:22 PM

[Chris B:]

Interesting point about the possible migration of banks, but in today's world of 100% electronic banking, distance probably doesn't matter. It might be wiser to locate wherever employees with the required skills and education can be found. NYC has that, but also crazy office rents. I expect some dispersal, but not all in one direction. It might be time to sell your NYC office REITs.

Yet like LifeSentence I appreciate the macro view. Turning off CNBC and looking at the big picture, long term, and questioning mainstream assumptions is the only strategy normal people can win at. So far, despite all the blood on the streets, this crisis has been limited to the participants who gambled in the mortgage industry and has not infected the entire economy aside from putting stocks on sale and inflating commodities and treasuries. Pure brokerages like AMTD and banks like USB can still make money, even today, in those traditional business areas. As consumers pull back, which they must, the reduction in banks probably won't be missed.

Looking beyond the headlines, the mortgage crisis will someday be resolved. Home prices will fall to historical levels and a certain percentage, but by far not all, underwater owners will have defaulted. At this point, perhaps in a year or so, default rates will become predictable, mortgage backed securities will have a known value, and life will resume.

At this future point, my long-term focus shifts to high levels of consumer debt impacting consumption, the expanding national debt, and overseas developments.

2008 Sep 17 05:23 PM

[Roebuck:]

As a homeowner who is underwater, I am NOT going to default. I'll keep making my payments like I promised. That's life. There are more important things than money.

2008 Sep 18 12:11 AM

[The-Honest-...:]

Why nobody thinks about the solution in these times?

How about sovereign funds buying one of the US banks? Too far-fetched? I MEAN, THE US HAS NO FRIENDS? Everyone wants to see it go down, is that it?

How about Goldman merging with Morgan Stanley?

I believe things get better only May 2009, which is overly optimistic considering most comments.

2008 Sep 18 12:51 AM

[WEBISKING:]

now that the short sellers wll reveal themselves we will get more transperency

2008 Sep 18 08:11 AM

[Socialism c...:]

Roebuck: Kudos! Sorry that you are taking a hit, but like you said - some things are more important. Like character. In the long haul, character will pay dividends. Believe it. I just wish others were so principled - know what you're signing, then stick to the agreement. We wouldn't have half this mess if that was followed.

2008 Sep 18 06:23 PM

[WEBISKING:]

This was needed

2008 Sep 19 07:17 AM

[Voice of Re...:]

There are many people and institutions to blame. Begin with the little monkey named Bush that has zero creditability and did what he does best, sit on his hands and mumble nonsense like everything is fine. Wink. Wink.. Then you have egg head Ben Bernanke that generates as much confidence in what he's saying as a bowl of cold oatmeal left on the kitchen counter overnight that has been behind the curve from day one and hasn't caught up let alone get ahead of the curve yet. Lets not forget Henry Paulson that seems unable to put five words together without stuttering. Where the hell do we find such idiots and give them so much power and responsibility only to see them fall flat on their faces over and over? Take the handful of fifth graders on the show called Are you smarter than a fifth grader and put them in charge. I doubt they could have done worse. In fact I know they would have done way better.

Speaking of idiots, Congress is front and center. Lets see, some couldn't vote for the original plan because it cost too much so 4 days later they approve a plan that costs over 100 billion MORE!

Then how about the executives at major banks and AIG? One guy smugly confirming, yeah, I got 1 million for consulting correcting the Congressman asking, no, not in a year, each month!

You want to know what's really wrong? Its the crazy "system". Where is it written that it's OK for investment banks, which by the way we don't have any more of, to leverage 20, 25, 30 even 40 to 1?

What kind of crap is it for so-called rating agencies to down grade companies' bond ratings, which drives their stocks lower, which in turn lowers the price more which makes it harder to raise capital which further delutes the current stockholder's equity. What kind of a circus is this?

What moron invented mark to market accounting?

Why did they get rid of the up tick rule?

Why are hedge funds allowed to engage in naked short selling which pushes companies to lose billions in value?

In case you haven't figured it out yet the real problem is confidence.

You can't trust what the president says, or Congress. The Bozos in charge at the Federal Reserve and Treasurary dept couldn't find their rear ends with both hands behind their back. Oh... and guess what, the fat cats on Wall Street and Main Street game the system and no matter what happens walk away with bags full og cash after wrecking companies in business for a 100 years while you see your investments race towards zero.

All that said, you know who the biggest idiots of all is?

Sorry, that would be Joe Average Investor, that's who. Just like in every Bear Market Joe at the very end panics and sells everything. Then Joe Six Pack sits on the sidelines as the market screams back up 20% or more, then gets back in missing most of the move back up.

People never learn.

2008 Oct 11 10:43 AM