If it’s not an emerging market - keep your money in the bank... unless of course that bank happens to be in America.
The mindless optimism that has infected markets in America this week - has enabled big U.S financial companies to binge like John Prescott... but on fund-raising... not cakes. Between them, they have raised more than $28 billion, which suggests that many investors believe the sector is poised for a strong comeback.
Just yesterday, we saw Merrill Lynch raise $7 billon — and that was after it raised $2.5 billion from a preferred share sale on Monday. Merchant bank Goldman Sachs and the commercial finance group CIT each raised $1.5 billion. On Monday, Citigroup raised $6 billion in new capital through a sale of preferred shares. Ditto with JPMorgan Chase last week...
There are obviously a lot of investors out there who are convinced that the U.S. financial industry is poised for a strong comeback. Citigroup’s chief executive, Vikram Pandit, has added his voice to the chorus of Wall Street bankers arguing that the worst of the credit crisis was over. "We are closer to the end" than the beginning of the crisis, he said at a shareholder meeting in which he and his fellow directors were criticised for the company’s recent performance.
Of course, given his circumstances, saying that there was worse to come couldn’t really have seemed like an appealing option. Then again, he might have been expressing an entirely honest view — in which case we think that he is dead wrong.
Here at Profit Hunter, we think that investors betting on a quick turnaround in the U.S. financial sector are setting themselves up for a massive hit. There is a lot more bad news to come.
What we need to remember about the current financial crisis is its roots in the U.S. sub-prime debacle. Huge numbers of people bought houses that they couldn’t really afford with money that they didn’t actually have in the hope that house prices would just keep on rising. They didn’t.
U.S. house prices nationwide have already fallen by an average 15 per cent since their peak in 2006, leading to wave of defaults on mortgage payments. Investors who bought the securities backed by those mortgages have taken massive losses as their values plummeted. Simply put, the health of the U.S. financial system is closely tied to the performance of the property market. And I believe that things are going to get a lot worse on that front, which rules out any quick and sustained recovery in the U.S. financial markets.
You see, the highly respected Yale University economist Robert Shiller predicts that there is a good chance that U.S. house prices will fall further than the 30% drop during the 1930s Great Depression. Shiller is a big name in property economics - he developed the widely watched Standard & Poor’s/Case-Shiller home price index. By Shiller’s estimation U.S. house prices rose by about 85 per cent from 1997 to their peak in 2006, after adjusting for inflation. That was the biggest national housing boom in US history, so the fall could be just as historic, Shiller predicts.
It doesn’t sound very promising, but George Bush offers this bit of encouraging news: "We're not in a recession," he told reporters at a news conference in with the leaders of Canada and Mexico. "We're in a slowdown... there's no question we are in a slowdown."
Between a rock and hard place...
The Federal Reserve is expected to try to do something about that "slowdown" when it meets next week. Another interest rate cut seems to be on the table. But, as I have pointed out in this newsletter before, the real danger with this spate of rate cuts is that they may simply end-up fuelling inflation while doing very little for the economy.
We may already be at that point. The National Association of Realtors, Lawrence Yun, is now warning that further rate cuts might actually drive mortgage rates higher as financial markets begin to worry more about inflation. Listening to Larry Yun makes me feel a twinge of pity for Ben Bernanke. It can’t really be fun being the head of a central bank right now; particularly not the Fed.
Whether the debacle we are now seeing in America will be played out on this side of the Atlantic as our own housing bubble deflates, I honestly don’t know but our investment strategy at Profit Hunter is clear. We are staying away from the U.S. and most U.K shares. Instead we are sending our money to sunnier climes.
In fact we’ve been helping our readers send their money to sunnier climes for years - as we have hunted down the best profit opportunities across the emerging markets
One such market I’ve got my eye on looks about to take a very lucrative turn. Calling the bottom of a market is a very tricky business... at present we’re looking at one such market that is as close to the bottom as I’d care to call. I firmly believe that it’s about to shoot up and make everybody who gets in now very happy. Find out what exactly I’m talking about - and where in the market you should have your money by clicking here right now.
All the best
Manraaj Singh
Editor
Profit Hunter
