Sunday, March 16, 2008

Is Wall Street Close to a Bottom?

A number of analysts claim that Wall Street may be near a bottom. Of course, most of these people are “talking their own book”; their firms make money selling investments to the public. Naturally most investors are jittery about investing right now after watching the roller-coaster of the past few weeks.

Of course these market assertion come around at the same time that the NBER is stating the recession could be "substantially more severe" than recent ones.

"The situation is very bad, the situation is getting worse, and the risks are that it could get very bad," NBER President Feldstein said in a speech at the Futures Industry Association meeting in Boca Raton, Florida.

"There's no doubt that this year and next year are going to be very difficult years."

The response to questions the NBER head stated that the downturn could be the worst in the United States since World War Two.

It is difficult to make a case for the recovery in face of this type of macro-economic projections. The locking up of credit, as seen with the Bear Stearns fiasco this week, is a very negative factor in the outlook.

This leads to the question of who’s next? The situation at Bear Stearns is a classic fear-driven run-on-the-back scenario where the entire investment community loses faith in the ability of an institution to meet its obligations. While Bear Stearns’ may have been the weakest of the big five investment banks; many pundits believe that others will follow the same path. Lehman Brothers, despite getting a new credit facility, and Merrill Lynch are viewed at risk. Other banks such are Citi have only survived with sovereign wealth fund infusions, a spigot that is about to be cut off.

Even power-houses such as Goldman Sachs are expected to reveal $3B in write-downs this coming week.

It appears that the financial sector has not bottomed out. Nor has the downside economic news, leaving the hope for a strong market rally as an improbable fantasy over the upcoming months.