Traderbill's Financial Markets Weblog

…everyone blamed the stock market selloff yesterday on the Bhutto assassination. That was not the cause. Before word even reached the markets of that, the report by Goldman Sachs analysts that Merrill will have significantly higher losses (if Goldie is so brilliant, how come Nouriel Roumini warned of this two months ago?); JPMorgan Chase may have to write-off $3.4 billion in fixed income securities…they also have  enormous derivative exposure; Citi will have to preserve capital and may have to cut dividend by 40% (dividend yield is up to 7.3% due to price drop), and raise $6.2 billion in capital to cover another $18.7 billion in CDO vs. $11 billion already reported. 

Merrill has already sold stock at a 10% discount to a sovereign fund and is holding a fire sale on assets without even bargaining…and Citi is reportedly starting to do the same. Merrill will even reduce the price further if the price continues to decline a year from now. Question: is that good for current shareholders? It most certainly is not! How do you have a 10% dilution at a 10% discount and think the stock is a buy? More of the new calculus that got the US and the world into this massive mess. Wake up! 

Furthermore broker were discounting an inventory $231 billion of junk bonds by 10% and debt from leveraged buyouts by 5%…learning from retailers?…if so, it takes more…much more! They had already reduced the $438 billion of leveraged buyout debt by 32%. Still think the problem is behind us? Just like the financial sector itself, big investors have to scale in…which is not to say they think the bottom is in, just that when it is they won’t be able to buy without running up the market…heed this! You will be able to get all you want of financial stocks cheaper next year. 

So you decide: do you respect rallies on low volume or selloffs on high volume (relatively speaking)? Do you think the Goldman report or the Bhutto assassination caused the selloff? Do you think stocks are poised to rally next year…after all it is a Presidential election year?…another one of those Wall Street maxims that are treated as gospel without looking at what happened in each prior instance. Is the economy strong…or weak and weaker? Is this the recipe for the dawning of a new bull market?

It is up to you to decide whether stocks are rich are cheap, housing is rich or cheap, and our government is good or bad…with all its accouterments that have created a massive, and rising, deficit plus funding a ‘war,’ high and rising commodity prices…especially food and energy. Of course you can look at those year to date returns and say things aren’t that bad…until they are! Stay clear till well after the new year!