Saturday, July 19, 2008

Are financials cheap?

The Wall Street Journal , New York Times and Barons apparently think the bear market is over in the financial sector. This has got to be the most ridiculous thing I've seen in a while. To think that the largest real estate & credit bubbles the world has ever seen will be corrected in a little over two years is to put it mildly insane. Heck we haven't even recovered from the tech bubble yet and it's been 8 years. The housing bubble dwarfed the tech bubble.

Now don't get me wrong there will be incredible bargains to be had in the financial sector at some point. But to think that the troubles in the financial sector are over is just plain nuts. This will be a multi year process to clean out the banking system. I suspect it will last longer than it should because it's apparent that the powers that be would rather try to patch things than let the cleansing process take it's course.

Let's go thru the process so far shall we. First of course there was the denial that housing was even in a bubble. Pretty amazing that anybody with a lick of common sense could possibly buy into that one in the first place. No doc loans, option ARMS, the public buying multiple houses without having the slightest knowledge of real estate, speculators standing in line to make offers on developments that hadn't even broken ground yet, etc. etc. No that wasn't a bubble (sic).

Next we have the subprime crisis last summer. It will not spread was the war cry at the time. I think it's safe to say it did in fact spread.

The soft landing and Goldilocks economy came next. That died a rather gruesome death pretty quickly.

No recession! Amazingly enough quite a few analysts are still trying to sell this one.

There will be another wave of foreclosures during the second half of this year and first part of next as more ARMS come due. Unemployment rises during recessions. That means defaults on not only home loans but also on loans of all types. All of this is still in the pipe and it's not going to magically disappear.

So while I agree at some point there will be incredible bargains in the financial sector it certainly isn't happening yet. Heck we've only seen a handful of bankruptcies so far. To think that this is now over is beyond reason. It is the height of stupidity in my opinion.

I'm going to suggest that there is absolutely no way that anyone can possibly know which banks are going to make it through the storm at this point. There will be hundreds of bankruptcies before this is over, not a handful.

There is simply no such thing as cheap in the financial sector at this point because we have no way of knowing who is going to zero.

So when you see stories in the media about the bottom in financials treat it for what it is...a joke.