A “Resolution Trust” for Credit Markets? Too late!!
We are now hearing plenty of discussion about the need for a modern version of the Resolution Trust Company.
We think that this is way too late, given the lag in getting anything through Congress. We are also approaching the traditional election recess.
We recommend that readers review our article from January, where we explained the need for timely action and Presidential leadership. TheStreet.com kindly moved this to the public site.
Perhaps they will do the same with some of my recent commentary.
Meanwhile, here is the key takeaway:
The US brand of democracy is reactive, not anticipatory. It requires strong Presidential leadership to succeed.
As regular readers of "A Dash" know, we feel that the current President, hamstrung by an unpopular war and low ratings, cannot provide the needed leadership.
It is an unfortunate intersection of a major problem with a lame-duck President. A Parliamentary system might have avoided this problem. Or a stronger President.
Conclusion
Astute citizens are belatedly realizing that bailouts are not just about the companies in question. The impacts affect us all. Nearly everyone owns real estate or stocks in a retirement program. Even if you do not, there are issues relating to local tax revenues — money for schools and public safety.
We are about to discover whether the patchwork of incremental solutions, with heavy reliance on the Fed, can meet the test.
Investment Implications
The normal relationships between stock prices and company fundamentals has been suspended. In our conversations with fellow professionals there was a consistent theme:
No one cares about the normal metrics. No one believes any earnings forecasts. There is widespread fear about the economy.
While our official posture (via the TickerSense sentiment survey) is bearish, we are nibbling and looking to do more.
If and when this changes, history suggests that the move will be sharp and swift. Art Cashin has often used the analogy of a cattle stampede. We shall see.
The normal relationships between stock prices and company fundamentals has been suspended. In our conversations with fellow professionals there was a consistent theme:
No one cares about the normal metrics. No one believes any earnings forecasts. There is widespread fear about the economy.
While our official posture (via the TickerSense sentiment survey) is bearish, we are nibbling and looking to do more.
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Not sure how to interpret this, and I don’t want to be disagreeable, but I want to make these points.
There are those who consistently over the past 12-18 months indicated that stock valuations at that time left the door open for significant downside potential for the overall stock market.
You mention that you are bearish. I’m assuming that is based strictly on technicals, and not valuation, since stocks were “cheap” at much higher levels.
What are the implications for using forward estimates in a valuation model when determining if one is buying in at a level with sufficient margin of safety?
Investment decisions/processes are a function of time horizon, and only time will tell, but I suspect those buying stocks at the October 2007 peak will not have satisfactory returns over the subsequent 3 year time frame. If so, what does that mean for a model that says stocks were “cheap” at that level at that point in time?
Wasn’t the recent move up off the July lows just another “bear market rally” given that the market is hitting new lows again?
FWIW, in my view, we are close to a short-term bottom, and I plan to exit my short-term SPY puts. We should get another nice sized rally soon once the panic/fear hits a peak and my sense is we are close.
Mike – As you note, investors have different time frames and purposes.
I do not find the typical designations of bear market and bear market rally to be very helpful, so I do not use them. I just try to figure out the best posture for each day.
You seem to have great confidence that recent stock moves reflect excellent fundamental analysis rather than psychology. The big bears “solve” the forward earnings question by putting in their own numbers, about half of the actual estimates.
We shall see.
Thanks,
Jeff
prof — here’s a bounce! maybe you can disabuse me regarding the ostensible trigger…
the letters ‘RTC’ are suddenly everywhere, but i read schumer’s comments on bloomberg to mean ‘RFC, as in reconstruction finance corp. his description of the plan is not to place failed banks in a vehicle for orderly liquidation; he’s talking capital injections into insolvent banks.
the former is all about price discovery; the latter about avoiding it.
i would be on board for an RTC — it’s a good idea to manage liquidation with gov’t liquidity. but RFC? now we’re talking zombie banks and an incredibly larger taxpayer (read: chinese central bank) expense.
thoughts?
and Greenspan gets 300k a speech-oh he irony
Gaius – There is probably a proposal that you and I would both endorse. It might not be the one that passes political muster — if indeed anything can qualify in time.
We shall see.
Thanks for offering much more insight into the taxpayer angle than the normal knee-jerk reaction.
Jeff
Upside — It is a sad fact that we live in a society mesmerized by celebrity — and willing to pay for contact.
In one of my former university positions I administered some grant money and we could bring in speakers. The administration was much more interested in the “star power” people who would help with town and gown than the distinguished professionals that might be (in my view at least) best for our students. It was surprising to see how even this group of intellectuals — tenured, scholarly, and hardly pop culture fans — were nonetheless swayed by personal contact with someone who had been on TV.
I could not agree more about the Greenspan speaking gigs.
Good point.
Jeff