Banking Games III

(Bank stock gains and economic expansion)

                Wow…… We are seeing the most astonishing series of moves since Michael Jordan came to the Tar Heels.  I’m talking about a comeback of mythic proportions much like when the Medfield college basket ball team came from behind to beat Rutland. During this supposed recovery, the banking system in this country is drawing investment dollars from the same people they draw them from the every time there is a false start, the small investor.

                Almost every professional investor who uses fundamental analysis or portfolio managers, and investment bankers would never go near an AIG, Citigroup, Fannie Mae, or Freddie MAC without being hedged to the hilt. Perhaps some technical chartist would for a move, but never an “investment”.  I mean come on, these institutions are bleeding money every day yet people are bidding these stocks up on the belief that the government has deemed them too big to fail. Even better, “Since the government owns xx% of AIG my money is safe and bound to grow.” Wake up and smell the flubber you’ve been snorting.

                The Federal Reserve and its printing press, the Obama administration with their endless bailouts, and the masters of siphoning money from the public on Wall Street will keep this market going when in fact it is still in the intensive care unit. What does it tell you when the savings rate and debt owed in this country is as high as anyone can remember it being? How about the unemployment rate? Dollars to doughnuts it hits double digits before the end of the first quarter 2010. How many companies have you seen eliminating “layers” of management? Cutting departments, R&D, eliminating benefits such as the 401k match or even the plan itself? Moving employees from salaried back to hourly and eliminating whole divisions? How much easing of the crunch on the consumer was due to oil falling back below forty dollars a barrel making gas prices at the level we could live with, stimulus checks and other programs?

                Of course we have seen some growth return to the economy! You can’t make these kind of changes at the corporate level and pour this much government stimulus on an economy and not see a jump. Now, what’s going to happen since we are no longer doing “cash for clunkers”? What happens in November when the $8000.00 first time home buyers credit goes away? The consumer is not able to return to the spending ways that this type of service economy requires. 

                As for stocks, you know as well as I do that the earnings estimates that are currently being “beat” are much lower that they were in 2007. Oil is now back above seventy dollars a barrel and looks poised to run higher after some consolidation of the recent run. Commodities have been on fire too, which is another puzzling discussion for another time. I mean how futures traders can be talking about a possible shortage of sugar when cane and production forecast point to a plus normal harvest? For the last two months we have been hearing about natural gas plays being the place to look next as prices increase and profits sure to follow. If that is so, why is this commodity making new lows?

                Take my advice; focus your investing on clearing your debt. If you are lucky enough to still work for a company that provides a match on a 401k, don’t leave any free money on the table. Invest it wisely and conservatively, but don’t leave free money lying around.  Focusing on paying off a 14% interest rate credit card is a much more of a sure thing than hoping a bank stock will earn you 14%. Although in this environment they seem to be on a run, but history shows they can go the other way just as hard. If you pay that credit card off and keep from running it up again, that’s a hard way to lose.

                You think the mortgage and housing crisis was bad? Look who’s on deck. The trillions that make up the credit card industry are teetering. There are credit default swaps there too you know.

Till next time make solid decisions, not only in finance, but in life.