Russell falls on bank nationalization rumors
Stocks continued their steep slide this morning on rumors that major banks may nationalize as part of the financial sector rescue. The news spurred droves of investors to seek safe haven in bonds and gold, the latter of which rose above $1,000 per ounce.
The Russell 2000 (NYSE:IWM) is down 3.78, or 0.91%, to 412.93, while the Down is down 0.94% to 7,396.10, and the S&P 500 is down 0.97% to 771.41.
Bank of America (NYSE:BAC) and Citigroup (NYSE:C), which have both lost more than 90% of their value in the last year, are seeing shares nosedive to levels seen in the early 80s and 90s on news that a nationalization of the banks is a likely possibility. BAC is down nearly 14% to $3.39, while Citigroup has tumbled 18% to about $2 even.
"It's a clear sign that the markets are expecting a high probability of them being nationalized,'' said Mike Holland, founder of Holland & Co, to CNBC. "The clear expectation is that shareholders would effectively be wiped out.''
Whitney Speaks Again
More depressing forecasts for the big banks from the best big bank analyst out there, Meredith Whitney. You may recall it was Whitney who forecast the dividend cut at Citigroup (NYSE:C) back in October 2007. That was three months before Citigroup actually cut its dividend. Whitney should also be credited as one of the few analysts to see the financial meltdown coming.
She still doesn’t like Citigroup and would be a seller at current levels.
In an interview on CNBC yesterday she said, “Most of the big banks would be lucky to break even or earn a little bit of money this year. I don’t think any of the banks that I cover will continue to pay their existing dividends.”
Apparently a few different fund managers thought it would be a good idea to add 104 million shares of Citigroup at a roughly average price of $10 and change a share. Bloomberg reports that Fidelity is down $874 million on this round of purchases.
Throw in previous holdings and the losses are well over a billion.
If you’ve ever heard the expression “Don’t try to catch a falling knife,” this is what it means. I don’t think it’s so much about trying to bottom fish for quality stocks. I think it’s more about assuming that one knows more than the market.
There are always clues and hints in the stock market... Sometimes they’re subtle (like Whitney predicting a dividend cut), sometimes they’re obvious (like Citigroup actually cutting its dividend). It’s the investor who seeks to derive meaning from the signs (as opposed to imposing meaning on the signs) that has the most success.
Market Trends
One thing that never ceases to surprise me is how long it takes for trends to manifest in the consciousness of investors. The government is selling Treasuries like there’s no tomorrow. Next week, a record $94 billion in short- and medium-term notes hit the block. The old record, $78 billion, was set just a month ago.
There can be no doubt that this is ultimately inflationary. And we got a taste of that from a larger-than-expected jump in the producer-price index Thursday morning. Eventually, investors will demand higher yields for Treasuries, which will really light a fire under inflation.
But despite that, long bonds still trade near record prices. I tell you, I feel better about my short Treasury bond position in my Recovery Portfolio every day.
Rant of the Year
In case you missed it, here’s a LINK to the phenomenal video clip from CNBC’s Rick Santelli that everyone’s talking about today. He’s got a great solution for stimulus spending. This is something we’ll discuss for sure.
Stock market news, commentary, and analysis from Chief Investment Strategist Ian Wyatt.
