They say the bodies are piled high on Wall Street of those who were right at the wrong time. Well, with all the soured predictions about financial stocks the last year, the grave diggers have been especially busy.
It began around a year ago when Bear Stearns began to plunge, and a famous currency trader from England put a few hundred million dollars into the stock. It was at about $120 at the time.
Then, Bear fell to $100 in September, and he bought a few hundred million more. In November, the stock fell to $80, and the British billionaire was at it again, averaging down in a way he never would have in the currency markets. Today, after losing more than 90 percent of his investment in Bear Stearns, I am not sure this guy is eagerly shopping in the financial bin for bargains.
Bear may have kicked off the body count, but it by no means was an isolated situation. Earlier this year, several banks and brokers raised billions of dollars in an effort to shore up their balance sheets. Even though current investors were suffering massive dilution, the positive spin was that the capital was going to provide breathing room, and within a few months the financials would be forging ahead again.
Typical investors in these earlier rounds were sovereign funds, which are large capital pools owned and operated by foreign governments such as China and Dubai. Citigroup sent the venerable Robert Rubin overseas to help complete one such deal. Regardless, all the investments made in January are underwater today.
Within a few months, the big financial firms were at it again, raising billions and creating even larger dilution. Lehman Brothers was the headline stock this time. The investors who bought shares should have known better. Hank Greenburg, the former chairman of AIG, invested millions in Lehman at $28 a share. In the middle of June, right after he made the investment, Greenburg said he had his guys all over the company looking under every rock, and they came away convinced that $28 was the bottom. I guess there was one rock they didn’t see, as Lehman is now trading for $16 and may never see $28 again.
The pattern continues. Merrill Lynch just raised more than $8 billion (most of it coming from Singapore’s sovereign fund) and also sold more than $6 billion of collateralized debt obligations. These were unloaded for 22 cents on the dollar, compared with what Merrill claimed they were worth only three months ago. And if that wasn’t bad enough, Merrill is providing 75 percent of the financing for the deal! In essence, the company has removed only 25 percent of the potential problem.
The upshot of this is that while companies may survive, investors may have either large losses or a much longer time frame before they make money. It is common for bubbles to correct around 75 percent before they bottom. The Dow Jones industrial average fell 76 percent by the time it bottomed in 1932. The nifty 50 stocks of the early 1970s fell 71 percent by late 1974.
The famous tech bubble of the late 1990s corrected 76 percent. If financials follow form, and I believe they will, there is a long way down before they hit bottom.
At the July 15 low, they were down 55 percent from the all-time high they set last May. They have experienced a rebound since, which could leave them vulnerable to an additional 45 percent decline from current levels.
On a different note: My concern about financial stocks is obvious, but I do not have more knowledge than anyone else about the survivability of any one institution. I offer my public apology to all employees and customers of Fifth Third Bank for implying otherwise on a recent appearance on WXIN-TV Channel 59.
Hauke is the CEO of Samex Capital Advisors, a locally based money manager. Views expressed here are the writer’s. Hauke can be reached at 203-3365 or at email@example.com.