Is There a Bogey-Man Out There?

In 2008, we knew that the mortgage-backed securities depleted the cash reserves at banks to the point that they were insolvent. In January of 2010, it was the uncertainty of Greek sovereign debt along with other European countries that caused a very sharp pull back for stock prices.

But it’s more difficult to find a culprit for the declines we’ve seen lately.

Yes, there have been weakening economic data, to the point that GDP growth may be below the 2% line. That’s close enough to negative growth that some are throwing around the "r" word: recession.

The debt concerns in Europe have spread even to France. Rumors about France’s biggest bank Societe General, or SocGen, have been swirling ever since the U.K.’s Daily Mail reported that fears were growing that SocGen was on the verge of collapse due in part to its exposure to Greek debt.

The Daily Mail has since apologized for the report, and removed the article from its website. Rumors of SocGen’s demise were, apparently, premature.

I’m sure we all remember the fear we experienced in 2008 when the markets were in freefall. Some of the causes we knew, others were nebulous, bogeyman type fears that lurked just beyond our ability to know them, name them, and thus, control them.

The recent declines in the stock market have felt that same way. We know some of the issues, but there still has seemed to be a big, nasty bogeyman lurking out there.

And truth be told, SocGen’s assurances that they are fine are reminiscent of Bear Stearns and Lehman Bros in the days before they went down.

Of course, there’s no way to know if SocGen is really in trouble or if the rumor-mill is in full spin. But the speed with which a true crisis hits might suggest that the SocGen saga is more rumor than truth.

The financial crisis hit quickly, before banks had much time to adjust their exposure. The European debt problems have been a car crash in slow motion. It’s been 18 months since Greek debt hit the news. Banks and other institutions have had a lot of time to manage their exposure to Greece and Ireland and others.

Have they used their time well? I don’t know. But I sure hope so.

U.S. banks have been killed lately, too. Clearly, if European banks go down, U.S. banks won’t be unscathed. But at the same time, we have a lot more clarity on the capital situation at U.S. banks.

This might sound crazy, but if you want to buy Citi (NYSE:C) or JP Morgan (NYSE:JPM), you have my blessing. Like Bank of America (NYSE:BAC), Citi is currently trading below its cash balance. Citi has about $100 billion in cash and a market cap of $83 billion. It’s also dropped 36% from recent highs. At current prices around $28, your upside could be 40%.

I can’t get on board BofA right now. As I told you after their recent earnings, I just can’t be bullish ion BofA when the bank’s mortgage liability is still so uncertain. If there was any doubt that the Countrywide acquisition was the worst acquisition in history, the recent decline for BofA should remove it.

JP Morgan and its "fortress" balance sheet is probably the healthiest of the U.S. banks. 15% gains from here are a pretty good bet.

If you want to buy some IBM (NYSE:IBM), Caterpillar (NYSE:CAT) or Microsoft (Nasdaq:MSFT) at these levels, I have no problem with that either.

I have also finished a special report that highlights three great stocks with the ability to weather a recession and outpace inflation. Each of these stocks is a leader in their industry. And I think they all are steals after the decline this week.

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Goldman Sachs (NYSE:GS) is saying that the Fed is likely to start QE3 in the near future. I’m not so sure. Monetary stimulus from the Fed is not effective, and the Fed knows it.

I expect we would need to see more deterioration from economic data before the Fed would consider acting. And I also think we are more likely to see fiscal stimulus from the government than monetary stimulus from the Fed.

I don’t usually go against a Goldman Sachs call, but this time, I am.

Finally, lost in the headlines this morning are terrific earnings reports from Cisco (Nasdaq:CSCO) and Kohl’s (NYSE:KSS). Cisco has been doing terribly for a while. That’s because it generates a lot of revenue from state and federal government spending. And we know that spending has been drying up. But last night’s earnings suggest that this revenue source may be stabilizing, and that’s a good thing.

As a big retailer, Kohl’s tells us that consumer spending is at least steady, too. These are both significant bits of earnings news. And when investors turn their attention from Europe and the banks, they will realize this.


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