July 9th, 2008
BAD NEWS BEARS --- HERE JUST TO VISIT OR TO STAY
AWHILE?
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Whether
we like it or not, we are in a
BEAR market. Technicians say that a Bear
market occurs when stocks decline 20% from their previous highs.
We, however, don’t needtechnicians to tell us that as we can
taste it.
The Dow Jones Industrial Average had
its worst June since the Great Depression. It
was down 9.4% in June, the worst June
performance since June 1930 when it lost 18%. All Dow gains
since September 2006 have been wiped out. Nasdaq and the S&P 500
were down about 9% for the month.
• General Motors, Citigroup and CBS saw
there lowest levels in more than nine years.
GM’s stockholders know that GM is in its
own Bear market as its low reached all the
way back to 1954 –- 54 years ago.
• The Venture Capital business is in Crisis. In
other words, it has virtually stopped. To our
knowledge there was not a single Initial
Public Offering (IPO) brought to market in
the second quarter.
• Far more importantly, conditions in the
credit markets do not seem to be faring
much better. The June 28th issue of the
Economist contained comments (page 84) that “Analysts at
Citigroup reckon that there is a $6 trillion overhang of
committed lending
facilities (to corporations) to be drawn
down, most of it at more generous terms
than borrowers could get now.”
• On June 7th Lehman said that Fannie Mae (The Federal
National Mortgage
Association – FNM) may need another $46
billion in new capital and that Freddie Mac
(The Federal Home Loan Mortgage
Corporation – FRE) may need another $29
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billion for a total
of $75 billion. These two
government sponsored, but stockholder
owned, companies are essentially the
backbone of the American mortgage
industry.
• And, it should be noted that another wave of ARM –
adjustable rate mortgage – resets
will be coming up in August.
• Difficulties are now popping up with homeequity loans
- $1 trillion of outstanding
balances in America. Problems with car
loans are surfacing as the debt on the car
exceeds the price the owner could get in a
sale. Same with boats and RVs of all types.
Commercial construction, strip malls and
other commercial real estate are in trouble.
Credit card losses are becoming a major
problem for the banking industry.
• The reasons for the above are as old as the hills,
but the problems, largely created in
recent years by highly creative financing
(the fountain of Wall Street’s and the U.S.’
and Europe’s banking industries’ wondrous
bonuses) and the means necessary to solve
them are possibly insoluble. The flip side of
extremely leveraged borrowing has once
again raised its ugly head. It never dies.
And we have not even mentioned the
very weak U.S. dollar or the price of oil and
other energy and agricultural commodities and
foods that are literally bringing multitudes of
people to their knees. Examples: The U.S.
program of burning corn to make ethanol is a
large contributor to record high corn prices.
Prices of rice and wheat are at levels where
more than 1.5 billion people are eating one meal a day, if you can
call it a meal. The price of food around the world is out of
control.
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Brock recently highlighted a partial
summary of conditions affecting today’s stock
and bond markets.
Credit Markets – banks, investment firms,
the Fed are in complete disarray.
Inflation – stocks experience P/E multiple
compression even if earnings are positive.
Many earnings downgrades on stocks
have yet to be announced.
The American Consumer is tapped out
and loaded with debt and declining home values.
Energy costs. Wait till the heating season
comes around in late August and people see what
heating oil and natural gas will cost them.
Elections: Obama – discounting a
democrat administration and possible large tax
increases on those that have money or earn
money.
Lowering of interest rates by the Fed will
not solve any of the above problems.
We have warned about these problems
for years, and about a year ago the Chickens
began coming home to roost in earnest.
In summary: many are beginning to
understand the magnitude of the problems we all face – aside
from issues such as Iraq, Iran, terrorism and other
international problems. Much of this has already been discounted
by the stock markets; and, while the stocks of many fine
companies have already declined materially, many of those same
stocks are beginning to show promise around these levels for the
patient value investor.
Many investors are very bearish and
this degree of negativism historically has
signaled the time for beginning to look for the positive side of
things. Downtrends in markets don’t last forever anymore than
uptrends.
We believe the natural cycles of the
economy and markets will begin to work
themselves out albeit the timing is still
premature.
Our main concern, however, continues
to be with the financial system. The magnitude of the problems
still being faced by commercial
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banks, investment banks, mortgage and
mortgage insurance companies, credit rating
companies and others dealing with these
problems, largely of their own making, is still an unknown despite what
they put out for public consumption. Until the nature and scope of these
problems have more clarification, we do not believe the markets will be
“settled” enough to establish a platform for moving forward.
Example: Citigroup is planning to
“offload” $500 billion of assets as the Financial Times puts it. On May
10th the paper reported “Citigroup yesterday announced a plan to shed up
to $500bn of unwanted assets and slash some $15bn off its cost base in
an effort to kick-start profit growth.”
A further comment about Citigroup by
the FT was “Assets the size of the Netherlands’ GDP will be up for grabs
as financial services group faces a different future.”
While Citigroup, until recently, has been the world’s
largest financial company, it is
still only one company. Oh Sandy, where are
you now when we really, really need you?
As we wrote in our last report: “On the
other hand, there is an ocean of money floating around the world, much
of it “oil” money that is seeking a home. We are attempting to
anticipate where that home may ultimately be so you also will be able to
feel at home.
John W. Hamilton
July 9, 2008
John W. Hamilton
jwh@hamiltonadvisors.com
Deborah J. Hamilton
djh@hamiltonadvisors.com
J. Brock Hamilton
jbh@hamiltonadvisors.com
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PRIVATE WEALTH MANAGEMENT SINCE 1980 |
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No part of this publication may be
reproduced in any form, or referred to in any other publication, without
express written permission. This article contains the current opinions
of Hamilton Advisors and does not represent a recommendation of any
particular security, strategy or investment product. Such opinions are
subject to change without notice. Information contained herein has been
obtained from sources believed to be reliable, but is not guaranteed.
This article is distributed for educational purposes and should not be
considered as investment advice or an offer of any security for sale. ©
2007 Hamilton Advisors, Inc. All rights reserved. Tel: 203 629 1112.
Fax: 203 629 1469
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