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 (NYSE: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 (NYSE: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 (NYSE: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. (NYSE:SCHW), and TD Ameritrade Holding Corporation (NASDAQ:AMTD), which did not get embroiled in failed sub-prime investments, as did the third sector leader E*Trade Financial Corp. (NASDAQ: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 (NYSE:BOH) is currently being traded at its 52-week high, and the other, Hawaiian Holdings Inc. (NASDAQ: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 (NASDAQ:ADBE), followed on Thursday by Oracle Corp. (NASDAQ: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.
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.