Wednesday, July 2, 2008

Dr Doom on oversold equities markets, commodity cycles and making money (Marc Faber)

From FT Alphaville:

Marc (Dr Doom) Faber marvels in his latest market commentary for clients at the number of analysts and strategists who have issued buy recommendations on financial stocks for the last nine months. AIG was a great buy at $70, at $50 and at $35. Now it is at $27. Same story for Citigroup, which is now down from a high of $57 to $17, and the list goes on…

More recently, the weakness in financial stocks has been spreading to regional banks – some of which, notes Faber, “will certainly go out of business”.

What seemingly escapes the attention of some pundits is that in an environment of decelerating credit growth and de-leveraging, financial institutions, which operated on huge leverage and still do, are extremely vulnerable to declining asset prices.

As others have said before him, the fact that a stock or for that matter any asset market, including currencies, declines by 60 per cent or even 90 per cent doesn’t make it necessarily a great buy, notes Faber.

Consider Kirk Kerkorian – not exactly a na├»ve and novice businessman – who thought General Motors to be a bargain at around $30 and bought close to 10 per cent of the outstanding shares. He sold his shares in the meantime but with the stock now at a 53-year low, he was clearly wrong about GM’s potential but shrewd enough to get out in time (current price $11).

So if one of the shrewdest businessmen and asset shufflers could misjudge the merits of GM so badly, we should have no confidence in calling a low for financial stocks. In fact, I see the financial problems spreading to the real economy. How so? Lending standards are tightening everywhere....MUCH MORE