Wall Street Says 'Oops'

Wow…

On June 6th, I forecast a dramatic fall in the stock market. However, even I didn't expect things would get as bad as they have this quickly. The S&P 500 has fallen nearly 9% since then.

All told, stocks posted their worst June performance since the Great Depression. Many pundits seemed shocked by this, despite the fact virtually every guest commentator on their shows stated that this was, in fact, the worst financial crisis since the Great Depression.

Leading the pack downward were financials. The financial ETF (IYF) fell an incredible 18% in a mere three weeks. Sector-wide financial firms hit new lows, led by Lehman Brothers (LEH) and Citigroup (C).

To me, this was deliciously ironic. These very firms were the first to pronounce the worst was over back in March. One by one, the big Wall Street CEOs made this claim. One by one they’ve had to issue rights offerings to raise capital. And one by one their stocks have fallen beneath the price of the rights offerings to new lows.

What’s truly incredible about all of this was that many firms were actually issuing buys in the sector a mere month ago. Goldman Sachs recently admitted to being “clearly wrong” on its recommendation of financials in early May. And Barron’s has admitted it was dead wrong to advise buying AIG (AIG) in February.

However, Merrill Lynch (MER) holds a special place for being the most schizophrenic firm on the street. Between June 2 and June 11, Merrill Lynch analyst Guy Moszkowski—who incidentally was the top ranked brokerage analyst last year—changed his tune regarding Lehman Brothers four times. He first shifted his stance to “neutral” from “underperform.” He then told clients to buy twice—June 4 and June 10—before shifting back “neutral” on June 11.

I have to tell you, this scares me. Rarely if ever will Wall Street retract an assertion. However, to my knowledge Wall Street has NEVER in its history publicly admitted to being wrong. God only knows how bad things are going to get if they’re doing this now.

So as badly beaten down as financials are today, I expect we’ll see greater carnage in future. Most of the 1Q08 profits in the sector came from either over the counter derivatives—non-regulated investments—or fuzzy accounting—counting debt write-downs as profit or moving rapidly depreciating assets to Level 3 to get them away from market valuations.

Given the recent action in financials stocks—as well as the self-deprecating admissions from Wall Street analysts—it's clear the market has caught on that the worst was definitely not over in March. It's not over now either. The primary revenue streams for financial firms—lending, M&A, and debt issuance—are drying up. I believe 2Q08 results will disappoint in the sector, pushing financial stocks even lower.

So as cheap as financials are getting, I say steer clear. Even Wall Street is telling people not to buy financials right now. It's nice to see a conflict of interest that actually helps investors for once.

P.S. Speaking of backtracking, Jim Cramer committed one of the most incredible self-contradictions I've seen in my entire life a few weeks ago. See for yourself: http://youtube.com/watch?v=_nkZ3eHeXlc.

I’m going to send Jim a mirror in the mail. I assume from his behavior that he doesn’t actually own one. Or if he does, he certainly doesn’t look himself in it.

Comments

[iThinkBig]

Have 30 days of food, buy a gun or ammo if you can't afford to buy a property 50 miles from the nearest major metro. Things are going to implode but it will be over quickly and rebuilding can proceed. During, the mob isn't very nice when society breaks down. Look at New Orleans and people's behavior.

Wal Mart was the biggest hero to get water and medical supplies to the population. Consider government response time and lack of leadership. It may be a couple of months before you get your first rations of yellow cheese and wheat pasta.

This is what happens when 51% of the GDP (government and megacorporations) don't consider throwing a bone to entrepenuars and the working class, it was raw selfishness. Our nation no longer plans 20 years out, we live for today and now a painful tomorrow has begun. Quite a shame actually, in the age of the supercomputer and access to human behavioral prediction models we have no excuse.

[bruin532]

Today did the "punge protection team" saved the day? Selling Gold and buying bank stocks and select techs to stop the markets fall? It all happened at the same time three hours after the markets opened.

[AmesTiedeman]

And it is not over. We are in for 18 months of hell.

[moonbat1775]

Here it is 2008 and still we have booms and busts. tsk, tsk.

Who would guess that a banking system built on fraud and theft via inflation would cause serious problems. Let's see
von Mises, Hayak, Rothbard, Hazlette and history since 1694.

I thought honesty was the best policy?

[icandoitdon]

hey, we got tax cuts didn't we? and we have a nice little war going on to help us out too. what's to complain about when you get tax cuts and war at the same time?

as for cnbc, you must understand that its bullish slant has nothing to do with making money in the market...its all about patriotism. we all know that market bears are unpatriotic.

as for cramer, his show is not about investing. it's an infomercial for his books. he works in the world's oldest profession...selling himself.

[AmesTiedeman]

Look, if anyone thinks the U.S. economy or the market is going up now, they are nuts. We are going into a deep hole. When was the last time every major industry was being crushed: Autos, Housing, Manufacturing, Finance, Construction, etc. We are in a big mess. We are likely to stay in this mess for a few years, not months. The big banks are broke. The lost their lending ability because of sub prime. No lending, no economy. People wonder what the Fed protects the banks. Folks, in Circa 2008 America we need the banks strong. Period.

[moonbat1775]

The Fed protects the status quo which has been crooked since 1913. Fractional reserve banking is just a sophisticated form of counterfeiting. The Fed exists to allow the banks to get away with it without worrying too much about bank runs.

People talk about sustainable this, sustainable that. How about a sustainable economy built on an honest banking system?

Too radical? Maybe you won't think so in the next couple of years.

[BlueDog]

That Cramer video is sickening. It's too bad so many people blindly follow his picks.

[fatcat]

What gets me is no one seemed to see this coming.I was short the financials all year and got stopped out over and over again,while the stooges on cnbc were saying the bottom is in,buy,buy,buy..

[squashnut]

human behavioral prediction models are the problem not the fix.

[daniela]

Great article. Yes, whoever listens to "gurus" like Cramer will burn like charcoal. One time I set up for fun virtual funds for stocks he advised to buy -- I was shocked how bad he is. He is scoundrel. I learned to stay away from any stocks this guy recommends. He always advised to buy stocks that are on top when traders are selling. He is the only one who reaps the benefits from advising to fools. But with all of these "analysts"--... you say something with confidence, you are right! I thought with banks we will see more gentle writedowns. Those CEOs have no idea what's going on. Boost for banks will come from overall economy improvement. THat can happen when oil price will adjust to reasonable level and companies will start hiring again. We are still in a dark tunnel. Terrorist supporting counties of OPEC must enjoy bringing America and the world down. They already bought stakes in at least one bank. Next thing they will own half of our banks. I wish America would fight for herself. We should not accept cash from just anybody.

[punk_ash]

I think it is time to start buying growth stocks, slow and steady, and not all at once, do not worry if things go down more. We are already buying 3000 points below the all time high on Dow. I will be horrified if Dow goes below 10000. I am hoping to do the buying between 10K and 11K.

[Manus]

I followed Barron's recommendation on AIG back in February and invested a considerable amount on the stock. That article has been so misleading that shows how biased are some recommendations of the financial media. I wonder if the author from Barron's did really knnow how to assess a company with such complexity as AIG. Which leads me to think that some articles (such as Barron's) biased to push an equity such as AIG.