Little To Fear But Fear Itself

The third quarter of 2008 will go down in history as one when real fear manifested itself in market behavior. Typically, such periods of outright despondency (capitulation) signal the end rather than early stages of a bear market. While there are ample underlying reasons for disquiet in the financial sector, the market is beginning to behave as if every bank in the country is on the brink of collapse. This is far from the case and the carnage of the past month clearly represents an over-reaction to a bad situation.

There is no doubt that the domestic real estate crisis is continuing to batter U.S. financials, the dollar and the global economy. Despite the carnage in markets like California, Florida, Las Vegas, Washington, D.C., Atlanta, etc., real estate values continue to decline largely because of a lingering supply imbalance. The vast over-supply of homes in these markets will take years to work down. However, many regions around the nation do not have this gross over-abundance of property for sale. Furthermore, while defaulted and non-performing loans (mortgages, HELOCs and unsecured) are rising nationwide, the vast majority of debt is being paid in a timely manner.

The Fed’s seizure of IndyMac Bank last Friday, far from calming things, has only deepened the general sense of fear and mistrust which now permeates the entire financial system of the country. No doubt there will be other bank failures. Analyst estimates say that as many as 150 banks nationwide will not survive this crisis. Problems at mortgage behemoths Fannie Mae (FNM) and Freddie Mac (FRE) have already required the intervention of Treasury Secretary Paulson to shore up confidence. To date, this intervention has not soothed frayed investor nerves.

Clearly, we are in a difficult situation and, to date, government action has not been sufficient to restore faith and trust in the system. As a result, each trading day sees steeper and steeper losses for virtually every financial institution’s stock. This unrelenting slide in value only makes it harder for financial entities to raise capital in order to put their houses in order.

In many ways, the panic begets more grim economic reality and the process becomes a vicious cycle. What is needed is leadership and courage on the part of investors, depositors and citizens. In his inaugural speech in 1933, Franklin Delano Roosevelt uttered the phrase: “the only thing we have to fear is fear itself”. These were bold and truthful words spoken in the midst of the worst months of the Great Depression. They remain true today. While clearly suffering through a period of—sadly—self-inflicted economic adjustment, the United States continues to have the most adaptive, resilient and dynamic economy in the history of human endeavor.

There are valuable lessons to be learned from this crisis and we have no doubt that they will help future generations build more rational and responsible economic structures. In the interim, it is helpful for investors to step back from the precipice and take a deep breath before joining in the panic that is brewing on Wall Street. We need a George Bailey moment here where we are all reminded of the need to show some spine and work to restore stability and trust in the financial system that serves us all. Without a restoration of that stability and trust, we face a long and difficult road ahead, indeed.

Comments

[LarryH]

Rah! Rah! Bring on the cheerleaders! Yes, there are lessons to be learned, but we don't know what they are yet!

You seem to be saying it sure is bad, just hang in there, etc., etc. I am as positive as the next person, but don't tell me to stand in the way of the semi because he has brakes. To me "hanging in there" is not just watching my holdings go down while the market tries to find a bottom. It means do everything I can to preserve my capital so I can redeploy when times are better. "Stability and trust." When this crazy turmoil stabilizes, then I will trust and put more money in stocks again. Until then, I can't fight the trend. I appreciate your positive viewpoint; it is too seldom mentioned, but you seem to be proposing a much too "calm down and take it" attitude for me.

[Mbuna]

A George Bailey moment is never a bad idea. However, your article underhandedly presumes to preserve the status quo without any call for responsibility to change how this situation came to be in the first place. FDR initiated profound changes and the lack of call for such in this article is suspect. I'm sensing a member of the "privatize gains, socialize losses" cartel here which makes the real underlying message to be "Pipe down and be quiet!, Can't you see we're busy taking your money!"

[dougnhi]

The actions taken so far by Banks and Government officials in regards to hiding bad assets and allowing moral hazard via excessive leverage have only exacerbated the issues. It's hard to muster a George Bailey moment when the banks geared their speculation by 30-50 or greater. The fact is that the banks ARE insolvent, and all the denials (followed by continual successive failures) isn't helping confidence in our leadership. Every day brings another run on a bank who's CEO claims solvency, and then a few days later claims that it's insolvent by accident. BS... These guys made their beds and need to come clean. When we see level 3 and level 2 assets get marked to reality (level 1), we'll know we're at the bottom. Until then, the market is in real trouble. We might see a relief rally, but the bear won't be finished until the debt and margin get's unwound and cleared. Buyers beware of falling knifes! Notice how each rally attempt fails to even lower levels? Until the capitulation, I'd steer clear entirely. Preserve capital and wait for better valuations. It will come, but not for a while yet. Maybe next year?

[Pauly B]

Yes we need some spine for sure. That starts with the leaders of these banks and GSE's and government officials. How can the CEO of Bear Stearns, Lehman, Fredie and Fannie, say they are well funded when the Treasury Secretary and FED Chairman have emergency meetings on weekends and on Monday we are given on a press conference on how they are going to be saved by the taxpayer. I dont believe any of them. Thats why the market is reacting the way it is. Boy these banks need oversight and boy do they need it bad.

I find it interesting that the FED Chairman comes out with new lending standards. I guess you can call these the old fashioned standards that should have never been lifted.

[iThinkBig]

Washington. Washington needs "change" and I am not talking about the Obama type either, he is one of the many Dem & Repubs disconnected with realities. How to change it? Newt says the responsible public servants should storm the Hill by running for office. But what Newt doesn't seem to get is that bright guys with decent ideas and NOT on the take, can't get elected without GETTING on the take through the RNC or DNC. What I am building (planning stage and early implentation stage) is a fund to get guys elected that want to serve, look at $130k a year as good money and who could then afford with the funds help to take a year off and run for office. The plan is in two phases:

Phase One: The appropriate methodology to find the right candidates out of the populations and screen them is a site called RagingDebate.com, a site I am building and will promote. The site puts four groups of people and data mines them into buckets: Investors, entrepenuars, scientists and concerned Americans. I won't give trade secrets about the site here as there is functionality that of these groups that create plans. It's a giant online think tank in-other words that has a profitable model and entertainment value attached :)

Phase two is contacting the Investor portion of the data from Raging Debate (yes I own the domain) and building the fund. It helps I am a media guru type that understands audience segmentation in marketing and messaging, because getting Investors to action on a long-term return model even as noble as saving America which affects every American investor can be like be difficult.

There, now that's a plan. Cheerleading to stand our ground and not be afraid without one is irratating. At least some of you know that leadership that cares about saving our country while earning a days pay honestly exist. Cheers to all of you, so many bright minds here I am sure I will be directly working with some of you at a point in time...