April 19, 2024

Buy on the bad news?

It was difficult to tell today if the late Monday afternoon rally that brought the Dow back almost 400 points off the lows of the day was due to program trades or real buyers “buying on the bad news”.  If the buying was from bargain hunters brave enough to commit their capital on bad news, they certainly had a lot of reasons to buy.  In fact, if there are enough investors willing to “buy on the bad news” that read the Wall Street Journal, then we should be looking at a 5,000 point rally.  Some selected Journal excerpts follow.

Stemming the Crimson Tide

The credit freeze turns into a full-blown panic; no one wants to lend to anyone including interbank lending;  over $4 trillion in banks held by uninsured (and nervous) depositors; no easy solution to a massively over leveraged global financial system; Wachovia debacle does not inspire confidence in government’s efforts.

Iceland Risks Bankruptcy, Leader Says

Island nation cut off from global financial system as government prepares to takes over nation’s banks; tiny country’s bank assets are 10 times the economic output of the nation of 300,000; krona off 40% this year against euro and inflation is 14%.

My Comment: Iceland is bankrupt already, they simply haven’t filed the papers yet. Iceland has no capacity to bail out their banks; the real question is who will bail Iceland out?  I guess no one saw any problem with a couple of banks increasing their assets to 10 times the size of Iceland’s entire economy.

Long-Term Bond Markets Dry Up

The highest credit rated companies are shut out of the long-term credit markets; “credit is all but shutdown” said William Bellamy, direct of fixed income; CDS protection on $10 million of investment grade debt now cost $185,000 vs. a $40,000 per the credit crunch

Bofa Cuts Dividend, Posts Lower Profit

Per CEO  Ken Lewis, “It’s a damn disaster…These are the most difficult times for financial institutions that I have experienced in my 39 years in banking.”

My Comment: Dividend cut saves Bofa $5.6 billion per year which is $5.6 billion less to be spent by investors (consumers) and $5.6 billion less to be taxed by the government.

Mall Vacancies Grow as Retailers Pack Up Shop

Mall vacancies see highest rate since 2001; shopping center vacancies highest since 1994; landlords are giving breaks to tenants to try and keep them from leaving.

My Comment:  Landlords have to give big concessions to keep tenants; lower rents result in lower cash flow and more defaults on commercial loans; commercial loans next big nightmare for the banks.  Despite markdowns of up to 60%, consumer keep their wallets shut (Big Discounts Fail to Lure Shoppers) as credit card companies decrease or close down credit lines in a self defeating cycle.  The consumer was tapped out before the credit crisis, living off of credit cards and home equity lines of credit; sounds like another massive government rebate program is on the way.

If further reasons are necessary to buy this “market bottom” on the “bad news”, just pick up tomorrow’s Wall Street Journal.

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