Financial Stocks May Have Finally Hit a Bottom
By Jeff Clark
March 13 , 2008
One of my favorite cartoons when I was a child was Mighty Mouse. It was about a mouse that had Superman-like powers – X-ray vision, the ability to fly, superhuman strength, etc. Mighty Mouse was also a ruthless fighter. One of his favorite moves was to fly up to just under a much larger opponent's chin and throw a blinding flurry of punches that left the enemy reeling.
Ben Bernanke must have liked watching Mighty Mouse, too. On Tuesday, our esteemed Fed chairman donned a pair of yellow tights and a red cape, stood proudly outside the steps of the New York Stock Exchange, and shouted, "Here I come to save the day."
He then unleashed a flurry of knockout punches that sent stock and bond bears reeling from the pain.
In short, Mighty Ben saved the mortgage market from a meltdown.
The Fed agreed to be the buyer of last resort for AAA-rated mortgages. Banks and brokers can now approach the Fed with AAA-rated mortgage debt and swap it out for AAA-rated Treasury securities at 85 cents on the dollar.
In other words, the Fed is willing to be a buyer in a market that had no bids. This is a HUGE development. And it quite likely signals the beginning of the end of the credit crunch.
Let's be clear... It's not all sunshine and lollipops from this point forward. We're still going to see billions of dollars in write-downs from bad mortgages. We're still going to see overleveraged financial firms teeter on the brink of bankruptcy. And we're still going to see crippled consumers struggle to meet their credit-card payments.
But the risk of high-quality, credit-worthy assets crumbling in price because no one is willing to buy is now gone. Gone, too, should be the risk of bankruptcy for companies being forced to liquidate these assets at fire-sale prices in order to meet margin calls.
So it's no surprise financial stocks were the main beneficiaries of Tuesday's historic rally. Financial stocks are down an average of 40% or more from their highs of last year. They're overdue for a bounce. The Fed's action on Tuesday, however, may suggest we'll see something more than a bounce. We may have finally hit a sustainable bottom for the sector.
If not, then we may need Mighty Mouse to throw a few more punches after the Fed meeting next week.
Best regards and good trading,
Jeff Clark
