Getting Past the Panic 13 comments
-
Font Size:
-
Print
- TweetThis
Warren Buffett may have been way too premature when he declared in May of this year that the panic phase of the credit crisis was over. Recent developments suggest, however, that there are good reasons to conclude that Mr. Buffett's prediction is close at hand. Evidence for this thinking can be found in two items posted in today’s media.
The first is the Financial Times commentary by George Soros (Recapitalise the banking system), which is a must read for all investors interested in understanding key aspects of the next steps in the credit crisis. The second is the simply awful results of the latest ISM manufacturing report.
With the near certain passage of the sweetened Senate bill, the Soros commentary may strike some as moot, for the Soros prescription will never go beyond the eyeballs of its readers. Such thinking, however, would miss the nuggets of insight embedded in his views.
Of special note is how mark-to-market for illiquid assets will die its deserved death. For example, Soros’ recommendation “could require the Treasury to provide cheap financing for mortgage securities whose terms have been renegotiated based on the Treasury’s cost of borrowing. Mortgage service companies…could expect the owners of the securities to provide incentives for renegotiation as Fannie Mae and Freddie Mac are already doing.” In other words, valuation will be (and in fact is being) determined not on the capital requirements of impaired banks but on the US government. This is, in effect, the same valuation result that will occur under the Paulson plan (see section 132 of the House bill) and the announcement of the SEC and FASB made yesterday re fair value and FAS 157. Bye bye, fair value. Hello, common sense.
Assuming passage of the Senate bill, the pressure on the House will be enormous, made all the more difficult to resist considering the extension of the business tax breaks (in the Senate bill) and today’s dire ISM manufacturing report. The business oriented realists in the House will hopefully make the connection.
Investment Strategy Implications
The financial markets are not out of the woods. But with the full faith and credit (and the attention) of the US government now fully engaged, it does seem fair to conclude that Warren Buffett’s premature prediction will now come to pass. If so, then it’s time to look past the panic and examine the economic debris that the unnecessarily disorderly deleveraging process has wrought.
In that regard, it can be assumed that overall operating earnings will decline moderately thanks to improving financial earnings (write ups!) offset by a substantial decline in the more cyclical sensitive sectors (consumer balance sheet repair via deleveraging). In the process, P/E ratios will likely continue their descent below their long-term average of 15x, but not into the deep recession zone of 8 to 12x. The near term effect should be a sense of relief for investors as the panic triggered by the credit crisis slowly recedes.
(Oh, did I mention the fact that the fourth quarter tends to be a very good one for stocks?)
Related Articles
|
Find People on SA
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largest
increase in followers
in the last 7 days-
1
David Fry
-
2
Philip Davis
-
3
Bill Gross
-
4
Tyler Durden
-
5
TraderMark
Fastest Climbers » -
1
-
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 13 comments:
When does the first tranche of bundled government losses go on the market?
Stay tuned for next year's anticipated repeat performance.
He also said "There is no way of telling when these down writings will stop" but the media did some truly bad reporting on what I consider a 'slip of the tongue'.
Next detail: It is unknown how far the bailout plan has changed, a lot of people are complaining.
If banks would need help it would be far better to simply buy up stock so when those banks indeed improve it could be sold at a profit. This could be done with or without dillution or a mixture of that.
At last the mark to market rule:
Wachovia had 75 billion on it's banking books but was sold for 2 billion.
Go to Barry Ritholtz for the filing of that detail:
bigpicture.typepad.com...
So banks complaining that rule 157 does all this evil is not very trustworthy...
On Black Wednesday (September 16, 1992), Soros became immediately famous when he sold short more than $10 billion worth of pounds, profiting from the Bank of England's reluctance to either raise its interest rates to levels comparable to those of other European Exchange Rate Mechanism countries or to float its currency.
Finally, the Bank of England was forced to withdraw the currency out of the European Exchange Rate Mechanism and to devalue the pound sterling, and Soros earned an estimated US$ 1.1 billion in the process. He was dubbed "the man who broke the Bank of England."
What is he planning next?? I have to give it to him he is one smart guy.
BTW. The writer should know that many commodity and energy stocks currently have PE ratios below the "deep recession zone of 8 to 12" What would he call a PE ratio of 4 to 8 - the "moderate depression zone"???
Nice to see you outside CNBC. How's your buddy Cramer holding up under the stress?
Smarty_Pants, Has anyone thought of selling them on Ebay? I mean, if someone would buy a piece of toast that looks like Jesus, there must be a market for all of this bad paper.
Buffett is often used as a "showcase" by confidence-builders to continue to buy into the Wall Street pyramid scheme that is going on right now. There maybe a short-term sucker rally after the bail-out, but it is not sustainable. Then we will really be screwed...
Has anyone thought to take a moment to reflect on the Mack-Mae bail-out? What happened? P & B went in there bazookas blazing then started to go through the books. Didn't take them long to figure out, they were really screwed... I predict there will be something similar on a grander scale.
Consider the fact that central banks are throwing in almost $100 billion dollars a day globally to free up credit without results. This bail-out buys SEVEN BUSINESS DAYS. Then what? Do Bush and Paulson go back to the rubber-stamp Congress for another $1trillion and tell all of us one more shot and it will work? Banks are refusing to budge in Europe with the infusion of over $100 billion -- the problem is so bad the OECD is going to sit all of Europe down to come up with something.
If Warren Buffett or Jimmy Buffett wants to buy into this risk, that's the American, free market way of doing things. To have Congress drag every man, woman and child onto the Titanic, I have a problem with that.
The Senate just wants to "get it done" as I keep hearing repeatedly in their bailout support speeches this evening... Sounds like Larry the Cable Guy is running that shop.
the aftermath of a panic is generally not a reversal in confidence and the beginning of a new bull market. confidence hasn't simply eroded...it has been shattered. great damage has been done and we are still a badly overlevereged country. government's hoping that we can resume business as usual as a result of this $700 billion capital infusion is a fantasy with little to support it than the hopes and wishes of those who have been wrong every step of the way through this bear market.
yes, look for a spike if the bill is approved but i suspect it will be short lived. once it becomes apparent that the medicine is not curing the disease the real trouble begins.
as for warren buffet's expression of "confidence" by investing in GS and GE, i'd invest every nickel i had if i got the deal he got.
and let me make another observation. isn't it strange that buffet coughs up just $5 billion and is able to extract virtually usurious terms from companies like GS and GE but the government...with virtually umlimited funds....has to buy worthless securities as a means of keeping these institutions solvent. what's wrong with this picture? why can't the fed's simply say "we'll give you all the money you want" (provided there is a real business there) as long as you give us...the taxpayer...preferred that yields 10%."
instead of selling their balance sheet the stupid bastards are giving it away. they belong in prison.
"instead of selling their balance sheet the stupid bastards are giving it away. they belong in prison."
Does anybody here find humor in the fact that the SEC and the U.S. Department of Justice pulled no stops at getting Martha Stewart over - what - a $10,000 profit via insider trading, while at the same time bankers were raping the economy by billions, if not trillions of $$$$ and the same U.S. Government is going to help them get away with it.
This is one morally corrupt county. But I totally agree with you icandoitdon, the damage is done, so let the fantasy begin. I heard one dumb congressmen on the news saying that a constituent of his, a car dealer, was "begging" for him to pass the bill. He had "dozens" of customers at his dealership, but they couldn't buy a new car without credit. The bull crap is getting awfully deep...
A friend of mine is a Congressional staffer and he told me don't believe anything you hear in the media. At their office, in California, calls are about 85 percent to vote NO, 10 percent for yes, and the others are death threats if she switches her vote.