GREAT OPTIMISM ON WALL STREET
EARLY JANUARY 2008
NOTE: After the holidays, hope in the markets was that the Fed would now step on the accelerator and that it was “bargain hunting time.” “Wall Street analysts flooded the media with predictions that stocks, commodities, and oil would resume their bull markets. After all, you do not fight the Fed. But my work suggested that these analysts and leaders in Washington would all be wrong.
Here is what I wrote at the time in the January 7, 2008 issue of Bert Dohmen’s WELLINGTON LETTER which was headlined:
Bear Market Confirmed!
So, where do the markets go from here? I think it’s very simple: we have an economy in recession, although it’s not yet recognized. It usually takes one year after the onset of a recession for most economists and analysts to see it.
In fact, I announced in December 2007 that “The Recession has Started.” One year later, the NBER (National Bureau of Economic Research) confirmed that indeed it had started in December of 2007.
I continued in the January 7 issue:
We have the consumer padlocking his wallet. The rest, namely corporate sales and profits, naturally follows—downward. And that means the ludicrous forecasts of double-digit profit growth by Wall Street firms will turn out to be just another siren song to lure unsuspecting investors to buy stocks, which the big trading operations want to sell short.
In the meantime, the large financial firms are rushing to the Middle East and Asia trying to find capital for their firms so that the firms don’t fall below required capital ratios, which would threaten their very existence. Much bigger write-downs of assets held by these firms will occur in 2008, meaning they need to get even larger capital infusions than have been announced.
The world’s greatest credit bubble in history is imploding. At the same time, our central bankers, especially in the U.S., are totally unprepared to handle it. They have repeatedly shown over the past 12 months that they do not even recognize the severity of the problem, much less come up with a solution.
And that’s how a financial crisis evolves and naïve investors are used to taking stocks off of the hands of the professionals who don’t want them.
Write-downs at the big financial firms continue to grow at an astronomical pace. William Tanona, a Goldman analyst, said in a report that he raised his fourth-quarter write-down estimates for Citigroup to $18.7 billion from $11 billion. Merrill Lynch’s forecasted write-downs are up to $11.5 billion from $6 billion, while JPMorgan’s will rise to $3.4 billion from $1.7 billion, according to Bloomberg.
Mr. Tanona said Citigroup will lose $7 per share, compared with a previous loss estimate of $1.50 per share. JPMorgan—even after its write-down—will still have about $5 billion in exposure to collateralized debt obligations (CDO).
(Note: “write downs” refer to reducing the value of the assets held, such as securities, as their values decline.)
The CNBC Survey of Big Money Managers
This survey of the biggest money managers was conducted by CNBC. As you will see, they don’t share my bearish opinion.
Only 2% thought the chance of recession is over 50%. More than 50% of managers believe the S&P 500 will finish up at least at 8% in the coming year, while financials will be the strongest sector and materials will be the weakest. Out of these, 33% said the index would gain 8%, while 23% expect a gain of more than 10%.
Well, we shall see. However, history shows that the majority is usually wrong.