The Shadow Stock Trader
Friday, September 26, 2008
By Horacio Marquez
Email – #21
** The last of the Major Real Estate Bubble Enablers Gets Wiped Out: WaMu No More, Emphasizes the End of an Era
We are witnessing major historical events: the demise or outright takeover for almost nothing of Fannie Mae, Freddie Mac, Countrywide, IndyMac, Bear Stearns, Lehman Brothers and Merrill Lynch.
And Morgan Stanley and Goldman Sachs have escaped with investments by Mitsubishi UFJ (to be closed shortly) and Warren Buffett.
The markets are panicky. US financials do not trust each other and have stopped dealing with each other thanks to the unknown value of toxic positions in real estate-related loans and structured financings in their bellies. The Fed is holding them up by providing liquidity to all those who need it and are still viable.
The situation has come to a cathartic climax that demands imperative government action. This action, in turn, necessitates the Congressional support. But while we’re waiting for the politically charged Congress to come to a compromise on a package that supports the entire system, the markets have sold off dramatically.
Remember, this is the same Congress who carefully avoided reminding people of its more than fifteen years pushing the Fannie and Freddie expansion down the throats of the banking system. And it’s the same Congress that allowed the creation of a shadow, unregulated banking system in order to put low-income people into unaffordable houses. A Congress that did not heed to early calls to go back to the tried and true banking principles that Bill Bonner called for in Empire of Debt, and I warned against in my article on the housing bubble in 2005.
But this same situation has been replicated around the world over the last twenty years in innumerable country-specific bubbles blowing up: Sweden in 1991, Mexico and Argentina in 1994, Brazil in 1995 and most of Asia, including Japan and South Korea in the late nineties, Russia in 1998 and Argentina again in 2002. I could go on and on.
In most of these cases, the solution came down to an IMF package or a joint-IMF and global bank package that saved the day. Each of these packages had to go through their Congresses.
I can’t tell you haw many hours I spent logged onto the Brazilian or Argentine versions of C-Span or analyzing likely outcomes through local contacts.
But in the case of the US, the package is self-dispensed, which is a huge advantage. Plus, it’s being spurred on by a much more sophisticated financial community.
While I’m not going to spend any more time discussing the detailed sequence of events and horse-trading that is going on right now–for this, you have a superb analysis in MoneyMorning.com: http://www.moneymorning.com/2008/09/26/creditcrisis-compromise/
All I can tell you is that I expect some package to go through, and that this package will work. This is my expectation based on similar events played in all the cases (other than Japan), especially with countries dependent on their integration to the global community. If they do not produce it, God help us all.
A Dose of Perspective
In these times, I will keep returning to Warren Buffett’s advice:
“The most common cause of low prices is pessimism – sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.”
And we saw Warren acting appropriately, heeding his own advice by buying not one but two companies: Constellation Energy and a major stake in Goldman Sachs.
That’s because in times like these, the strong get stronger:
JC Flowers, for instance, is buying a very small bank, which will be the flagship for acquisitions going forward.
Just like in all the crises that I have seen around the world, the survivors (JPM, BAC, WF, PNC, USB, etc.) will thrive and run away with the whole market. Why?
- They buy the best assets of the demised (or dying) company very cheap
- Lower competition means much greater market share, much higher margins, less pressure on compensation
- They benefit from the giveaway stimulus to the industry (low Fed Funds = high net interest margin), while not having to expense anywhere near the amount of toxic waste that the weak companies have rolling around in their bellies.
We must do like Warren Buffett and the surviving banks, acting judiciously, without over-extending ourselves and picking up value with discipline.
In this sense, we recently (finally) saw consensus to open the US Continental Shelf to offshore drilling. As I have been writing, it makes sense to open this scarce resource, which sits unproductively, available to reduce our energy costs, increase jobs in the US, and reduce our trade deficit and our oil dependence.
Especially since three major hurricanes have already gone right smack through the middle of the Gulf of Mexico fields with no spills or environmental problems. The current fields, specified to withstand category 5 hurricanes, came out victorious once more.
The major exploration ramp-up bonanza will benefit the premier oil service firms like Schlumberger (SLB) and Transocean (RIG), which are the largest members of the play I recommended yesterday: Oil Services HOLDRs (NYSE: OIH).
As the package eases the liquidity crunch and stimulates the US economy, this will propel prices of oil and commodities higher again. I also saw, in analyzing a Canadian resource company, that materials’ demand for them and other players is not abating and is not seeing price drops. (Look for my commentary to appear this coming Monday in MoneyMorning.com.)
And add to this the recent analysis I did on both Brazil and China:
- Brazil is still growing strongly, although not as fast as last year, and they are proceeding with new steel and iron ore projects, since demand has not abated
-China, while worried about a US slowdown, is seeing its central provinces continue to grow unabated at 12%-14%. Their coastal provinces have already restarted the major electricity and factory production halted for the air-cleansing Olympic efforts. This is equivalent to half of Mexico’s electricity production coming back online.
So do not count on continued commodity and oil weakness. Especially since all major financials have already liquidated positions, and commercial players have been depleting theirs, waiting for lower entry points. Just witness last Friday’s short squeeze, when oil went up by $10 a barrel in one day.
In this light, we also added materials though the Materials Select Sector SPDR (XLB). Although materials have suffered an excessive correction, we should see in short order a reigniting of demand both in the US, China and in other emerging economies, as liquidity comes back.
Enjoy and Profit,
Horacio Marquez
Stock
Current Price
Comments
Oil Services HOLDRs (OIH)
$157.62
Buy
Materials Select Sector SPDR (XLB)
$35.20
Buy
HealthShares Enabling Technologies (HHV)
$31.82
Buy
Market Vectors Agribusiness (MOO)
$39.54
Buy
Energy Select Sector SPDR (XLE)
$68.02
Buy
Market Vectors Steel ETF (SLX)
$58.36
Buy
iShares MSCI Emerging Markets Index (EEM)
$35.79
Buy
Vanguard Financials ETF (VFH)
$41.16
Buy
iShares MSCI Australia Index (EWA)
$22.62
Buy
Market Watch
NASDAQ
1462.11
0.00
SP 500
778.12
0.00
DJIA
7395.70
+178.73
As Of 5:33AM 3/18/2009
