Wednesday, January 14, 2009

TROUBLED WATERS AHEAD?

After faint hits at rallying, with investors, portfolio managers, and securities analysts, alike forgetting about - THE RECESSION, the stock market is off to its worst yearly start ever. Ever!

As usual, analysts are only NOW getting with reality and slashing - well so far cutting - earnings estimates for 2009. DUH!!!!!!!!!! Where were they when the handwriting was all over the walls like gang graffiti as recently as October? November? December?

Earlier this week, we saw Citigroup, Inc. (C - NYSE) forced to sell a 51 percent stake in its Smith Barney brokerage biz to JPMorgan Chase (JPM - NYSE). Why? They badly need capital. And if you're wondering what's left of Citigroup after Smith Barney, well....largely one of the largest banks in the world. "Too Big To Fail?" How many times will we hear that round in 2009?

Just today, we learned that Bank of America (BAC - NYSE) has gone back to the Fed, hat in hand, "asking" for more TARP money to cover Merrill Lynch losses. "Too Big To Fail?"

Here's the thing about the financial sector: Rather than establishing a mechanism where we can encourage the establishment of new banks, or even solidify the standing of smaller banks that have actually been well-run, the Bush brain trust has seen fit to toss tens upon tens of billions of dollars at the biggest banks, the ones that worked overtime to get us into this mess in the first place.

Rather than establishing broad programs to attack the foreclosure problem - which will only worsen as unemployment continues to rise and as the largely un-talked about ticking time bomb of option-ARM mortgages looks to explode over the next 12 - 18 months, the Fed is feeding bad banks, banks that believe there is no one to which they can actually lend.

Analysts talk about a possible, if not likely, turnaround in auto sales later this year, some suggesting that December 2008 may have actually been the bottom for auto sales. Two questions:

1) As unemployment becomes ever more problematic, who is going to buy these cars?

2) As credit scores decline - as a result of unemployment, bad mortgages, and the rules of credit scoring changing mid-game - who will be able to qualify for a loan?


The likelihood of the stock market not only retesting the November 2008 lows but breaking them, as was reiterated here in December - sorry about the hiatus - is not off the table.

Will there be pockets of strength? Sure. It's more than likely that the worst of the wholesale selling is behind us. So there will be some boats that float, and some that are and will continue to become just plain too cheap to not own if you are looking down the road a few years.

Lots of stocks declined today and the volume behind the declines relative to volume on the buy side was pretty darned heavy. Given the breadth, the good news to take away is that prices could have declined much more than they did. I can easily make a case for many many stocks simply being too cheap to not purchase. But so long as clueless analysts being slow or unwilling to pull the trigger on downgrades and slashing earnings estimates, well cheap is too relative for most folks to be able to sleep at night.