Friday, 21 March 2008

The Bottom Callers Are Back

One of the biggest contrary indicators that the stockmarket has further to fall is the amount of bottom calling going on in recent days. Maybe I watch too much CNBC but it seems everyone is either saying we have seen the bottom or we are in the process of bottoming. Probably the biggest call recently has been from Dick Bove of Punk Ziegel & Co, from

Bove says financial crisis over, buy banks

The financial crisis is over, giving investors a rare chance to buy bank stocks at attractive valuations, Punk Ziegel & Co. analyst Dick Bove said Thursday. During crises, problems reach a crescendo when even the most optimistic market participants become fearful. That usually prompts government and business to join forces on a big solution that may either work or fail, Bove said.

The collapse and near bankruptcy of Bear Stearns Cos. (BSC) last week was the trigger for the current crisis, pressing President George Bush, Treasury Secretary Hank Paulson, Federal Reserve Chairman Ben Bernanke, President of the Federal Reserve of New York Timothy Geithner and key industry executives into emergency action, the analyst said.

"The actions taken by the Federal Reserve were innovative, dramatic and, in my view, brilliant because they went right to the problem," Bove wrote in a note to clients. "The actions being taken by the Federal Reserve are being mirrored by the Treasury, which now has finally grasped the scope of the problem."

Interest rate reductions and steps to inject more cash directly into the banking system will help banks generate more profit. While most market participants are still worrying about write-downs and falling home prices, investors can now buy bank stocks at their cheapest levels in almost two decades, Bove said.

"The last time an opportunity of this nature existed to buy bank stocks this cheap was in 1990," the analyst wrote. "The next time will be in 20 years. This is a once in a generation opportunity."

I suspect Bove has taken a look at bank stock prices, concluded that they can't go much lower and decided to make a big call. Firstly in an attempt to make a name for himself and secondly to try and repair his reputation after calling Citigroup a buy when it was around $30 (now $22.50) and for repeatedly saying Citigroup didn't need to cut it's dividend. Time will be the ultimate arbiter in deciding whether Bove is a sage or an idiot, I suspect it will be the latter.

Forgive me if I don't share Dick Bove's and CNBC's view of the world. The state of the US mortgage market, where a large part of the problem emanates from, is not getting any better. In fact, according to Fitch ratings (not a very reputable source I know) things are getting worse.

I stole the above slide from a Fitch presentation made yesterday and posted on Minyanville. It shows clearly an acceleration in Alt-A default rates. Let's see what else Fitch had to say:

Fine, but what about the full-court press by government officials to modify loans to prevent foreclosures? Sorry. Glenn Costello, co-head of Fitch Ratings, said on the conference call update that "loan modification programs have been slow to gain traction and have not mitigated foreclosure rates." He added that while the Federal Reserve's aggressive easing policy has eliminated near-term Adjustable Rate Mortgage shock risk, the weakening economy will likely offset this benefit.

Let me add that those rates are going to get worse as we are now in the midst of the biggest wave of resets and as next week's Case-Shiller Home price index will show, house prices are continuing to decline.

The theme here is deflation and as stated before the Fed's attempts to reflate will ultimately fail to prevent deflation across stock prices and commodities as well as housing. Commodities have looked increasingly fragile in recent days prompting Michael Panzer, author of Financial Armageddon to note on Kudlow & Co yesterday, (click the link to see the segment)

I think what you saw in the commodities this week actually marked the end of the year of leveraged speculation and I think it sets in motion the next leg of financial armageddon I'm afraid....I think they (commodities) have been bid up on the back of financial excesses, I think that is now becoming unwound and I think they are going to fall into line with the broader deflationary trends, contrary to what everyone else is arguing about, inflation. The deflationary trends from a bursting credit bubble are going to have their impact on commodities and everything else.

Couldn't have said it better myself Mike. Commodities might have one last gasping leg left in them but I think Panzner is on the money. Unfortunately for Panzner, whenever he appears on Kudlow & Co he is outnumbered by the sneering pollyanas. Yesterday they comprised of Jerry, the big fat idiot, Bowyer and Jeff, could I possibly have a more stupid look on my face? Kleintop.

Compounding the issue was Michelle, everytime I open my mouth I sound even stupider, Caruso-Cabrera, filling in as host in Krudlow the Clown's absence. After Kleintop, (who by the way has been telling people to buy stocks all the way down for the past 6 months) gave his usual clueless views on why the stockmarket has bottomed, Panzner stood his ground and offered what I think is a very sound perspective:
At bottoms people don't even see them coming and that's the tradition, that's the way markets have worked for hundreds of years. When you have everyone running around now that they see the light at the end of the tunnel it means they see an on-coming freight train.

Well put. I suspect the bottom callers will be disappointed as they have been every time the market has rallied in the last few months on false hopes.


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