Was it a start, a finish, or both?
Manic weeks like this one in the markets test investors in so many ways. Including their ability to withstand massive metaphoric pile-up.
Was it the beginning of the end? The end of the beginning? Did the financial system dodge a bullet -- or a cannonball?
Some key take-aways from the wild week that was:
* They all can agree on one thing: More help, please. It’s difficult, if not impossible, to find anyone on Wall Street who isn’t expecting an eventual federal bailout of bad mortgages.
Money managers, economists, investment strategists -- they all believe the endgame of the housing-centered credit crunch will be the government taking some portion of troubled loans out of the banking system and onto its own books.
They believe it even more now than they did before the shotgun marriage of debt-challenged brokerage Bear Stearns Cos. to JPMorgan Chase & Co. last weekend, financed in part with a $30-billion emergency loan from the Federal Reserve. It’s not surprising that such an extraordinary move would stoke expectations for more government involvement.
Many investment managers, particularly those who own mortgage-backed bonds, pitch the idea of government purchases of those securities as a win-win proposition: Once Uncle Sam takes some of the loss-ridden bonds off the market, the argument goes, private investors will believe that the bottom is at hand and will jump in as well, betting that the bonds are undervalued relative to the potential recovery rate on delinquent loans.
So Wall Street’s straight-faced message to taxpayers is, “You go first; we’re right behind you.”
* Itchy trigger fingers make for huge rallies. Big investors still may be wary of mortgage-backed bonds, but the heady advances in the stock market Tuesday and Thursday showed the hunger to get back into equities.
The Dow Jones industrial average rocketed 420 points, or 3.5%, on Tuesday, after the Fed followed its rescue of Bear Stearns with a three-quarters-of-a-point cut in its benchmark short-term rate, to 2.25%.
After giving back 293 points Wednesday, investors reconsidered and took the Dow up 261 points Thursday, the final session of the holiday-shortened week, to end at 12,361.32.
The net gain for the week: 3.4% -- substantially more than a money-market mutual fund will earn this entire year. Of course, the Dow still is down 12.7% from its all-time high in October.
Bill Strazzullo, a partner at financial advisory firm Bell Curve Trading in Freehold, N.J., says most of his institutional clients are anxiously posing the same question: Isn’t it time to bulk up on stocks?
Strazzullo says he’s warning about another wave down in share prices in the next few months. His view is that the credit crunch is just beginning to hurt the economy beyond residential housing.
And with so many people eager to call the bottom in stocks, Strazzullo says, he reminds himself that true turning points in falling markets often occur when demoralized investors stop looking for them.
As a contrarian, “I feel lonely -- which makes me feel good, honestly,” he says.
* A “once-in-a-generation opportunity” in bank stocks? Richard Bove, a veteran and oft-quoted bank stock analyst at boutique investment research firm Punk Ziegel & Co., may have helped drive Thursday’s sharp rebound in depressed financial issues with a report that didn’t mince words.
“The financial crisis is over,” he declared in the report. With the Fed fully engaged in bolstering the financial system, and more government help likely (see item No. 1 above), Bove said bank stocks were poised to recover from what he has previously termed “ridiculous” price levels for some, including Citigroup Inc.
“This is a once-in-a-generation opportunity” in the banks, Bove said. The last such opportunity, he said, was in 1990, at the height of a sell-off tied to soaring losses on commercial real estate loans.
His picks include Bank of America Corp. ($41.86 on Friday), Pittsburgh-based PNC Financial Services Group Inc. ($67.51) and San Francisco-based UnionBanCal Corp., parent of Union Bank of California ($51.65).
Bove was prescient about the current sub-prime mortgage debacle, warning in a 2005 report about absurdly lax lending and predicting, “This powder keg is going to blow.”
But he was a bit early with that call. Likewise, his table-pounding for some of the banks didn’t just begin Thursday. He shifted to a “buy” rating on Citigroup in November, when it was at $30.70. On Monday it closed at $18.62, before rallying to end the week at $22.50.
Bove advised selling major brokerage stocks, including Bear Stearns, on Dec. 4, then shifted to “hold” for most of them Feb. 4.
Still, his candor about the financial business has always been refreshing. Whether bank stocks soar or crater from here, everyone’s going to remember Bove’s call.
* Where’s the next fire in the debt markets? Let’s say, for argument’s sake, that Wall Street has priced into financial stocks the worst that’s going to happen in terms of losses on residential mortgages.
Has it also priced in what’s ahead in losses on credit cards, auto loans, corporate junk bonds, commercial real estate loans and other forms of debt, as the borrowing binge of the last decade continues to unwind?
The most troubling thing about the credit crunch that began last year is how it has spread to parts of the financial system that few investors ever thought much about -- until it was too late.
Ask the investors who now are stranded in the floating-rate debt of so-called closed-end mutual funds. They can’t get out because the market for that paper has dried up, even though brokers sold it as a highly liquid short-term security.
On Thursday, even as most financial stocks rebounded, shares of commercial and consumer finance company CIT Group Inc. tumbled $2.01, or 17%, to $9.63, the lowest since the firm went public in 2002. CIT warned that it was forced to draw down a backup credit line of $7.3 billion because normal sources of funding have evaporated.
There also were more rumblings of credit trouble in Europe. The London interbank offered rate, or LIBOR, on three-month euro loans between banks continued to rise this week, reaching the highest level since late December, despite the Fed’s efforts to calm global jitters.
The renewed jump in euro-loan LIBOR suggests that European banks are growing more nervous about lending to one another.
Bill Gross, chief investment officer at Newport Beach-based bond fund giant Pacific Investment Management Co., or Pimco, warned in a recent commentary that more types of debt would end up the equivalent of the Old Maid in the card game of the same name -- i.e., the card you don’t want to be left holding.
So far, the fact that sub-prime mortgage bonds “have garnered the headlines is only because they were the asset class that failed first,” Gross said.
Bell Curve’s Strazzullo believes that the unwinding of the debt binge will, at a minimum, keep the stock market on edge for a while. Investors who want to buy, he said, should take their time.
Even if many stocks hit bottom in the last week or two, Strazzullo said, “There are enough problems, fundamentally and technically, facing the market that it isn’t going to run away from you.”
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