US Banking Crisis — Stock Market Fundamentals (13)
January 31st, 2009
US Banking Crisis — Market Fundamentals (13).
The recent meltdown of the US banking industry is the single most disruptive force that will likely trigger a worldwide recession and a prolonged decline of the stock market. Lets see if we can learn something from the market fundamentals.
Financial Stocks Down
Since June 07, financial stocks started to decline. They reached a low point by June 08. The following shows the carnage: Citigroup: from $55 to $14, Bank of America: $55 to $20, JP Morgan Chase: $55 to $30, Morgan Stanley: $90 to $12, and Goldman Sachs: $250 to $90. Since then, the stocks have rebounded somewhat.
Two Main Causes
The first one is the lowering of interest rate by the Federal Reserve. For fear of a recession induced by the dotcom bust and the 9/11 terrorist attack, the Fed continued to lower interest rate from 6.50 in May 2000 to 1.75 in September 2004, then adjusted it gradually to 2.00 by April 2008. This has created an unprecedented flow of easy money for the banks to lend.
The other main cause is the absence of supervision by the Bush Administration because they believe that the market will solve all problems of society. One thing they could not see is that greed knows no limits. The bankers continued to lend and lend in order to maximize profits.
The best place for banks to lend is real estate because it is the most tangible collateral. Thus the easy money fueled the housing boom. When housing prices continued to rise every year, the bankers invented the sub-prime loans where consumers were seduced with very low interest rates for the first few years, then the rates would be adjusted back to normal. In a housing boom, it makes sense for the consumers to take a loan to buy a house regardless, then sell the house for a profit before the rate adjustment comes. What the banks failed to see is that when they lend billions and billions to homebuyers, it will become their big problem if too many homebuyers default at the rate adjustment time within a few years.
Consequence
The result is an ugly mess of bank failures and billions of mortgage write downs for the banks. Increasing mortgage defaults also cause housing prices to drop. Business failures occur everyday but bank failures are quite different. They result in contraction of credits on which all businesses depend for daily operations, especially the automobile industry. Besides worrying about the next paychecks, people also wonder if their money is safe in the bank. Thus it leads to a crisis of confidence that can easily bring down the whole capitalist system. No wonder the US Congress was so scared to pass a massive $700 billion bailout bill within a week. Will it work? It depends on how big is the mortgage problem that nobody knows.
Uncertainties
The following may happen in the next few months:
More banks may fail in US and overseas.
The US may lead the world into a deep recession.
The stock market may continue a prolonged broad decline.
Hopes
The massive US bailout may work. At least it draws a line of defense to protect the big banks like Citigroup, Bank of America, JP Morgan Chase, and Wachovia (to be purchased by Citigroup or Wells Fargo brokered by US government). The rest will be left to die or merge with other banks.
Where is the Bottom?
The major bank stocks appeared to have touched a bottom in July 2008 when Citigroup reached $13, BankAmerica $18, JP Morgan Chase $29, and Wells Fargo $20. They have all sprung back quickly since then. The government bailout may have prevented them from falling further. But then, who knows? We have only seen the fact that they briefly touched a bottom. If there are more banks collapsing in the next few months, the mood of the market will depress these stocks further.
If you have surplus cash and are willing to take risks, the major banks mentioned above are good candidates for a rebound. However, never try to guess the bottom. You have to see the bottom to believe it. We have seen it once recently but it may be a mirage. If the economy continues to worsen, there will be another bottom to watch. I remember during a prior downturn around 1992, CitiBank stayed at $9 for quite a while.
For further information, please email to stockfessor@comcast.net
Author: stockfessor
Keywords: stock market invest mutual fund retire finance
Added: October 7, 2008
Aim mutual funds
This is a Texas based mutual funds company. But in reality this aim Mutual Funds Company is the subsidiary of the UK based Invesco Company. Aim has become now Invesco Aim. In this article I will write as aim mutual funds only but it will be applicable as and for Invesco aim mutual funds. Aim mutual funds are one of the largest mutual funds families. The total number of core mutual funds is actually a little less than hundred. But the interesting point to note is that this aim mutual funds company offers you several hundreds of mutual funds if you take in to consideration various class shares offered by aim mutual funds Company. Once upon a time, there was a major famous insurance company. Three young executives were handling the asset management department of this famous major insurance company. The three experienced executives decided to come together to form a new company of their own. They left the jobs in the insurance company and formed their own aim mutual funds company in 1970. The names of the founders of aim mutual funds Company are Bauer, Robert Graham, and Garry Crum. The aim mutual funds and Invesco were merged in 1997 to become Invesco. Aim Mutual Funds Company has grown by buying other mutual funds companies from time to time. In 1986 they purchased Weingarten, Constellation and Charter mutual funds. In 1992 aim mutual funds purchased CIGNA mutual funds. Aim mutual funds are supposed to have assets worthy more than sixty billion dollars. Aim Mutual Funds Company was the first mutual funds company to provide online access to your mutual funds account. Aim Mutual Funds Company has achieved phenomenal growth due to its policy of acquisitions and mergers. Aim mutual funds are run by management teams. However some leading names are associated with some of the popular aim mutual funds. Among them are Jason Holzer, Bret Stantley, Juliet Ellis and many more. What sorts of mutual funds are available at aim mutual funds? There are life style mutual funds. There are passive type mutual funds. There are active type mutual funds. You can get international mutual funds. You can get equity type mutual funds. ETFs are also available at aim mutual funds. As mentioned earlier there are hundreds of mutual funds available at aim mutual funds. Here is the list of some of the popular aim mutual funds. 1 AIM international growth fund. AIIEX, 2 AIM China AACFX ,3AIM Charter fund CHTRX 4 AIM energy fund IENAX 5 AIM Constellation Fund CSTGX. It should be noted that aim mutual funds are loaded mutual funds. If you feel that non load mutual funds are better, then do compare them with these before investing. Aim mutual funds are well known best performing mutual funds of 2007.
