...And when will they get to laugh all the way to the bank?

IIPM : EXECUTIVE EDUCATION

“The credit bubble is just beginning to unwind, and while US borrowers are being blamed, they were really just a pawn in a global game”

I am not so sure about this view. Consider that in the case of MBIA, the buyout firm Warburg Pincus was aware of the exposures to lower quality CDOs, prior to making its investment in the company, when it announced on December 10, 2007 that it would initially invest $500 million by purchasing MBIA shares at $31 each! This announcement initially helped restore some investor confidence and pushed MBIA shares as high as $37.50, the day the deal was announced. But, now with the shares changing hands at $18, the deal does not look that great (and may not even be completed). Similarly, Citigroup shares jumped from $30 to $35 after November 27 on the announcement that the Abu Dhabi Investment Authority (ADIA) would make a $7.5 billion investment in the company. But as can be seen in figure 8, it has since then given back the entire rebound and some more! Moreover, if we look at long term charts of Bank of America, JP Morgan Chase and Citigroup, considerable downside risk still exists. In the case of Bank of America, the stock could still drop from $41 to below $30 while JP Morgan Chase could decline to between $20 and $30 from $43. In fact, each time a Sovereign Wealth Fund makes an investment and stocks rebound, they seem to provide excellent exit opportunities. Blackstone Group has declined 24% since its initial public offering in June after China Investment agreed to buy a $3 billion stake in the firm. Bear Stearns has declined 26% following its sale of a stake last October to Chinese government controlled CITIC Securities. Therefore, I would consider selling UBS stock here or on any rebound, following the announcement that the Government of Singapore Investment Company and a Middle Eastern investor made a SFR 13 billion investment in some convertible bonds.

Three observations:

a) I have never experienced a bull market in equities without the participation of financial stocks. In addition, when financial stocks across the board collapse, it is a very negative sign for the overall health of the stock market.

b) The fact that a stock has declined from the peak by 50% or even 90%, does not make it necessarily inexpensive. In 1985, I recommended the purchase of a basket of Texas banks, which at the time had declined by 95% from the peak, as a contrarian play. Subsequently, they all went bankrupt!

c) As I have explained before, the financial sector has become disproportionably large over the last 15 years or so. Therefore, I would also expect the reversion to the mean of the financial sector to take several years and not to be completed in just six months! In short, I would avoid purchasing financial stocks for now and would also defer new commitments to equities. Of some concern to me is that on rallies, the list of 12-months new highs does hardly expand and that the NYSE Advance – Decline Line is trending down.

Marc Faber

For more articles, Click on IIPM Article.

Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

Read these article :-
‘This is one of Big B’s best performances’
IIPM to come up at Rajarhat
IIPM awards four Bengali novelists
ZEE BUSINESS BEST B SCHOOL SURVEY
B-schooled in India, Placed Abroad (Print Version)
IIPM in Financial times (Print Version)
IIPM makes business education truly global (Print Version)
The Indian Institute of Planning and Management (IIPM)
IIPM Campus
The Hindu : Education Plus : Honour for IIPM
IIPM ranked No.1 B-School in India, Management News - By ...
IIPM Ranked No1 B-School in India
Moneycontrol >> News >> Press- News >> IIPM ranked No1 B-School in ...
IIPM ranked No. 1 B-school in India- Zee Business Survey ...
IIPM ranked No1 B-School in India :: Education, Careers ...
The Hindu Business Line : IIPM placements hit a high of over 2000 jobs
Deccan Herald - IIPM ranked as top B-School in India
India eNews - IIPM Ranked No1 B-School in India
IIPM Delhi - Indian Institute of Planning and Management New Delhi ...
domain-b.com : IIPM ranked ahead of IIMs