Thursday, April 3, 2008

From across the pond: The Banking Crisis

The mortgage credit crunch has not only impacted banks in the U.S., but has shocked financial institutions overseas. Filmed after the demise of Northern Rock in the U.K., this edition of Dispatches featuring Jon Moulton outlines the financial meltdown. The clip is an excellent educational summary of the greed-driven problems in the credit market that has left the world on the brink of recession.


Anonymous said...

Hi Greg,
I was wondering - there's a slew of bad news to be around, and yet the markets seem to be shrugging this off. Looks like most of the bad news is out and the general consensus is that valuations are low, and its time to buy. The HingeFire blog has been highlighting a lot of the bad news; do you think that the financials and real-estate have only upside here? Two of the short ETFs that I track (SKF and SRS) have come down considerably - time to buy them or time to be on the bullish case ?

GregB said...

Just when you think that the bad news will stop, the financial sector comes out with further bad news. Clearly the credit crunch did not get off the books of the major banks in the fourth quarter reports. This UBS announced a $19B writedown and sacked their chairman, while Lehman re-capitalized itself to prevent it from becoming the next Bear Stearns.

When looking the KBW Bank Index or any other financial index, there does not appear to be any clear indication of bottoming. The financial stocks may rally slightly in the short term, but the overall trend (coupled with continuing bad news) appears to be down.

Homebuilders are a different story, the majority of the bad news is out. the PHLX Housing Sector Index and other homebuilding indexes appear to have bottomed, and are building a base for increases. This may be the time to take long positions in some of the stronger homebuilders from a valuation perspective. Recognize that some of the weaker builders may still go kaput due to the impairments on their balance sheets and tightening credit.

Generally from a risk perspective, I would get out of long SRS (UltraShort Real Estate ProShares) and consider staying in SKF (UltraShort Financials ProShares)... in my opinion.

Keep in mind that SRS is more of an invese play on REIT and real estate management than homebuilders. Most REITS have taken a hit, but still have solid businesses and cash flow. It would require a big "R" type of recession to really give this group further significant downside.

I started looking for bottoms in the market (including financials and homebuilders) back in January. Earlier HingeFire hosted a poll asking if financials have bottomed, the overall answer from everyone was that there is more downside left in financials; a statement which still appears to stand today.