The ongoing credit crisis reminds me of a horror movie. You sit in your chair, freaked-out, covering your face with your hands and peaking only briefly to see if it’s safe to watch again. Well, that’s exactly how I feel about bank stocks these days.
Over the last ten days approximately 20% of all companies in the S&P 500 Index have reported Q1 earnings. As you might expect, the markets have been glued to bank results. The numbers, of course, are lousy, with more write-downs plaguing all the majors while some smaller regional banks have actually fared much better amid the worst credit storm since the 1930s.
It’s interesting to note that several high-profile CEOs, including Jimmy Diamond of JP Morgan Chase, just proclaimed the “end of the credit crisis” this week. Other CEOs have also suggested the same believing the worst of the squeeze is behind us.
That might sound reassuring to some investors, but not to me. Remember, these are the same guys that just days before Bear Stearns collapsed were telling us the investment bank was “liquid and solvent.” So, if there’s one thing this credit crisis has taught us, it is that we cannot trust Wall Street. In fact, we must suspect everything they say or print because they obviously do not have a grip on this runaway credit train.
I do, however, have respect for Merrill’s top-boss, John Thain, former head of the NYSE.
In a Financial Times article this morning, Thain claims his peers are probably too early in calling a bottom to this crisis: “I hope those who say we are at the end are correct – I am skeptical. Consumers are just beginning to feel the impact of higher food and energy prices. We haven’t yet seen the full impact on the real economy.”
It is true that some segments of the credit markets are now stabilizing, but others are still simmering to a dangerous boil. These include the most dangerous of all – credit derivatives or CDOs, which have a notional value of about $45 trillion (with a “T”) – more than the combined value of U.S. bond markets and housing values.
We still have a long way to go before the credit crisis draws to a conclusion. What we are seeing now is a lull in the ongoing storm, or a bear market rally for stocks after five straight months of losses. Stocks remain an underweight position in my portfolio.
See you on Monday. Have a good weekend.
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