Wednesday, July 2, 2008

Where we are and where we're going (and why are we in this handbasket?)

Okay, I added the parenthetical, the first half of the headline is from MarketWatch:

When we entered 2008, we offered a fresh set of forward-looking expectations. With a conscious nod that we must stay humble or the market will do it for us, it's time to reflect on those thoughts as we cast an eye towards the back nine. See related column
Theme 1: Hedge funds buying brokers
January thought: The critical issue facing financial institutions, after years of engineering and risk recreation, is the solvency of their balance sheets (particularly if they're forced to move Level III assets back onto their books). Look for large, well-capitalized hedge funds to take selective stakes in troubled brokers as the financial continuum comes full circle.

During the recession of 1989 to 1991, 25% of the financial universe disappeared. Thus far, in the midst what is an entirely more problematic credit crisis, only 8% has evaporated.
Given the financial sector shed 50% of its value since last spring, the "easy" downside trade has passed. Some banks and brokers currently in existence are doomed to fail but the winners who traverse this prickly landscape will be in a position to prosper on the other side of the slide.
I continue to foresee mergers as a function of need rather than want as institutions strive to survive. Many hedge funds don't have the balance sheet baggage of the big banks and will look to capture inherent brand and infrastructure value.

Theme 2: Migration toward a middle-class mindset...

Theme 3: Return of the dollar
January thought: While risk remains -- for instance, if OPEC decides to denominate crude in euros -- it's important to remember that the dollar "crash" already occurred. The greenback is off 37% since 2002 and a stunning 97% since 1913. Factor in the widespread negativity of money managers, rappers and supermodels, and a counter-trend bounce doesn't seem so strange....MORE