On January 12th, 2007, Bear Stearns stock price closed over $171 per share. On March the 11th, 2008, it closed just below $63 per share. On Sunday, March 16th, the Federal Reserve Bank assisted JP Morgan in organizing a “rescue” of Bear Stearns by purchasing shares of Bear Stearns at $2 per share. A week later, the “rescue” price was increased to $10 per share.
The point of all this is that, in the investment business, things frequently are not as good as they might appear and, just as frequently, are not as bad as they might appear. As we are writing this commentary, the Dow Jones Industrial Average has rallied almost 400 points today. This rally was led by the financial stocks. Why? Because UBS securities announced they have lost $37 billion, Merrill Lynch has lost $24 billion and Citigroup has lost $18 billion, all due to investments in sub-prime mortgages. The conventional wisdom here is that, if these companies are finally announcing the TOTAL amount they have lost and that there will be no more losses, the credit crisis must be near an end.
If the sub-prime mortgage crisis was the only crisis, there might be reason to celebrate. We are not there yet. Signs that the sub-prime mortgage fallout is more far-reaching than just the credit crisis include:
- Bankruptcies in the US increased 15% in February to 76,120, the highest level since bankruptcy laws were changed.
- US non-farm payrolls fell by 63,000 in February after declining 22,000 in January.
- US retail sales declined 0.6% in February.
- The Consumer Price Index increased 4% for the 12-month period ending in February.
- On March 17th, oil traded as high as $111 per barrel. The average price of gasoline reached $3.20 in March.
- New home sales slid 1.8% in February to the lowest mark in 13 years according to the Commerce Department.
- In March, light-vehicle sales fell 19% at GM, 10% at Toyota and 14% at Ford.
Is there any good news? Not much. Existing home sales increased 2.9% in February from January, the 1st increase in 7 months. However, year over year, sales were down 24%. Given all the above and more, we would be very surprised if the global economies will be turning positive any time soon.
The flight to quality (Treasury Bonds) has caused municipal bonds and some corporate bonds to look attractive relative to Treasuries. Boyer & Corporon Wealth Management continues to recommend relatively high allocations to cash and short term fixed income securities.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.