by Jack Lee
DOW SOARS 368 POINTS to close Friday!
To put this day in context it was not so long ago that many financial stocks once traded in the range above $60 a share. They were “steady eddies” with decent slow growth and a nice dividend just like they were supposed to be. They were retirement quality investments for many Americans. Suddenly the real estate market imploded and the ripple effect was reaching deep into the financial markets where we learned more than we ever wanted to know about derivatives and shakey business practices. These bundled loans were labled AAA when they were a mixed bag of both good and sub-prime loans. Those stalwart stocks of the financial industry suddenly sank!
Citi Corp, Bank of America, Washington Mutual, Providence Bank Shares, Cadence, Wachovia, Goldman Sachs, Morgan Chase, were among hundreds of financial institutions representing several trillion dollars in secured and unsecured assets and they were all in serious trouble, some were going under! The one thing the stock market hates is uncertainty and there was plenty to go around, uncertainty turned to panic as the sell off went unabaited for weeks, then months. Goldman Sachs fell from $250 to $90 recently. Others were far worse off. Washington Mutual was once a $60 stock and it went under $2. Wachovia was $60 a year ago and it dropped to $9 days ago.
There was blood in the financial waters and the sharks rushed in, short selling and effectively crippling stocks temporarily by removing too many shares from trade. But, just as bargains began to realize amid all the risks there were gems to be bought for fractional prices. And as supply and demand was about to kick in and take the market in another direction the feds also stepped in said, “No more short sales on financials!” It was like a double jump start. The feds also bailed out America’s biggest financial firms like AIG, FNM and FRE and hinted at setting up another resolution trust company to take over bad debts like they did for the Savings and Loan debacle that wiped out hundreds of billions of dollars thanks mostly to President Ronald Regans deregulation plan.
What happens when you stop short selling and the feds make guarantees that the big guys can’t fail? For starters the short sellers were creamed! Wiped out in a matter of hours!!! The stock market has surged wildly for two days now and the little people are flooding the market to get a little piece of the action. Since most financials stocks were greatly oversold the long term ownership of these stocks poses little risk for new investors or at least that is the prevailing wisdom.
There will be profit taking, but under the new rules that may not happen for quite some time, the market could have a lot of “artificial” strength. Some financial institutions may still fail, but they will be small and manageable and the overall prognonsis is cautiously optimistic. The only thing that is tempering this bonanza to some lucky investors is the loss to the average taxpayer will be horrific! They will eventually have to pay for the all bailouts and supports and it will be a very high price that will have long lasting effects on our national debt and our overall economic strength.
A friend of mine who is not a rich person, but a savvy stock player, saw this coming and invested $120,000 a financial stocks less than a week ago. Today that amount has grown to $197,000!! Its quality stock, least it was prior to the real estate implosion and now they’re selling for less than half price from just 6 months ago. Many investors see this as plenty of room left to go up. The stock market for some like my friend has become a modern day version of the old pioneer gold rush. For those staking claims on bargain stocks the reward has been fantastic and they are in for the fast money.
Oh what a difference a day makes on Wall Street!