Nick Massey
The Edmond Sun

EDMOND — Well, I guess I’m overdue. I haven’t gone into a rant about the Fed and bankers in awhile, so here I go again. As you’ve probably noticed, I’m not a big fan.

Sometimes supposedly smart people turn out to be nothing more than a title and an empty head. Or to put it in terms of an old Oklahoma saying, “All hat and no cattle.”

With that thought in mind, you need to read the recent notes from the Fed. If it makes any sense to you, please send me a translation. You would have to laugh as they said nothing, took both sides of every issue and were uncertain about everything. If you will recall, this is the Fed that told us for two years that housing was not a problem, subprime was not an issue, to this day says inflation is anchored and while energy and food are higher, says don’t worry because it will get better.

Now, with the inflation rising and the dollar dropping, their hands are tied. They are good at one thing though — reporting the news after it already happened and always too late to do anything about it. Recently they said it was better than 50-50 we are going into recession. Thanks!

Let’s go over some things I have been saying about financial stocks. Typically the groups that led a market down continue to lead it down. That means financial of all types as well as housing. When I was on CNBC’s “Squawk on the Street” last week, Mark Haines and Erin Burnett were hoping I would say financials were a bargain and investors should be buying. I disagreed.

Banks and investment banks have been writing off assets on their books at unprecedented amounts. Just when you think it couldn’t get any worse, it does. They still can’t figure out for sure the value of their Level II and Level III assets. If they can’t figure out what their assets are worth, how are we supposed to figure out what the stock should be worth? If you can’t value it, don’t buy it.

The biggest challenge for many of these institutions going forward will be how they’re going to make money. The old game is over and many of the things that contributed to their earnings for the past few years are not there anymore. Even when they finally stop making write-offs, banks are not going to make the type of money they recently made because of less leverage, less capital and more risk aversion. We are seeing the massive de-leveraging of our credit markets and the end of the days of easy credit. This is just the beginning.

According to most financial reports, banks have taken about $350 billion in asset write-downs. That left many under capitalized and they have had to raise additional capital to stay in business. While this keeps them in business, it dilutes shareholder value and earnings per share. Yet, most financial reporters acted like this was somehow good news. I guess compared to going out of business it was good, but that’s about all.

Indications are that banks have raised about $250 billion of new capital, leaving them about $100 billion below where they used to be. Since banks typically leverage about 10 to 1 by lending money, that means there are about $1 trillion worth of loans that are not going to happen. If, for example, they now have twice as many shares outstanding as before, that means they would have to double earnings just to get back to the old earnings per share and stock values. How is that going to happen in the current environment?

Sure, financial stocks may be close to a short-term bottom and some people say they could be a bargain here. That may be true on a short-term basis, and if you are a short-term trader there may be an opportunity here. But we don’t invest that way and the longer-term trend doesn’t look good at all.

No one ever believed Citibank stock could go into single digits, just as no one ever believed other big names could go broke either. I suggest you continue to ignore the calls of cheap “value” or “oversold” by people who just don’t get it.

With five major financial companies making up part of the Dow Jones Industrial Average, it’s no wonder the Dow is now at its lowest level in almost two years. What is really funny is that Goldman Sachs recently put out a sell recommendation on Citibank and Merrill Lynch. Merrill responded by returning the favor. Now it seems everyone is downgrading everyone else and the finger pointing has increased. No wonder many “regular” people think this is all a rigged game. Thanks for reading.

Source: EdmundSun