Philip Gvinter

10 Contrarian Reasons for a Bottom

I tend to agree here. I think that we have what has been referred to as a Santa Claus rally followed by another leg down and than we can talk about a real bottom forming. I still feel that while stock prices are beaten up they are not cheap when measured against anything but the trailing 12 months of earnings and that analyst estimates for S&P earnings for next year are much too high. I think that $65 is a much more realistic level than the $80-$95 that many analysts are still forecasting. That having been said a "cheap" price for the S&P would be somewhere in the 600s so a very realistic scenario would be one last nasty leg down some time in Q1 09. The counterpoint to this is the argument that all bubbles tend to over-correct before a recovery which would mean the low 600s or lower for the S&P.

This Recession Will Be Anything but Deep

I disagree with the fundamental premise here. While government intervention is indeed finally becoming effective the recesionary effects of the restoration of sustainable credit standards and general common sense in the pricing of risk will still mean significant housing and commodity price declines. These declines will lead to a deep recession and an equally sharp recovery. We are however at least 12 months from the end of the recession and at least 6 months from its bottom. It will be time to buy stocks again once more reasonable earnings are priced in for FY 09 which will likely happen some time between Q1 and Q2 earnings reports. Bond yields also need to come back towards reasonable levels. Banks do indeed need to make money, and in order to do so they need to take risk. It is extremely difficult to make money by taking risk if the price of the risk is artificially deflated.

Why This Bailout Can't Work - And What Will

I disagree with your assessment of the rationale behind the bailout plan. The plan is not meant to prop up the many insolvent financial institutions with overweight exposure to questionable debt. Instead it is meant to provide a reasonable floor for the price of these questionable assets. Currently there is not a single buyer for these assets at anything but distressed prices which discount their fundamental value (in my opinion about 50% of par) even further and create transactions at 20% of par value. This forces other financial institutions to write down the value of similar assets below the reasonable 50% level all the way down to their current market price of 20% of par. This forces dilutive capital raises and ripples down through the financial system. The purpose of the bailout is to stop the collateral damage caused by such a situation by creating a fund for the purchase of these deeply distressed securities upon the failure or regulatory closure of these institutions. The many poison pills chief amongst them the equity position which must be given to the fund and the limits on executive compensation will make voluntary participation the equivalent of bankruptcy to participating institutions. In my estimation most of the ALT-A mortgage debt originated in Q2 2005 and later is garbage. This is approximately 2.5T of debt (please feel free to correct me if my estimate is off) the $700B would not cover enough of this to truly "bail out" any institutions. The point is to set a reasonable floor and take away the distress discount applied to these securities. I have no problem with that and feel that if priced appropriately we the tax payers may be able to make a small return on the purchase of these assets if we hold them to maturity or at least until the housing market has found a true bottom and the securities become easier to price fairly given an availability of reasonable predictions for recovery rates (currently unavailable because we do not know how far the value of the collateral in this cases houses and commercial properties will fall) thereby allowing investors to buy with a typical level of confidence in their risk adjusted rate of return.