Tuesday, May 20, 2008


as the financials continue to slump, i can't help but think that the market is beginning to fully realize that the problem with the financials is not just fixing the balance sheets, but the probable fact that earnings power is dramatically weaker without the benefits of fees from structured finance and that this weaker earnings power itself will be dramatically diluted due to the capital raises. this is a change in my thinking, as i had been under the notion that it was more about fixing balance sheets; and that the snapback would be quicker. not to mention that the capital raising efforts, though well along, are still probably not done.

as long as the financials can get the money they need to repair their balance sheets, i am now arguing that the problem is theirs, not ours. to this point, last night aig increased their plan to raise capital from $12B to $20B. not only will they further dilute shareholders, but all that CDS business that they need to write off is not likely to come back any time soon. thus, the remainder of their earnings will be further diluted and just as insurance is entering a soft market. sounds terrible, but only if you own the stock. as for the rest of us it sounds like one less crack in the financial system to worry about.

i recommended c at 22 and at 18; and declared victory when it reached 26. now at 22 or so, i'd not be surprised to find it at 18 again this year. bac seems stuck between 35 and 40 for a long while i'm afraid. i own gs; and it's the best one, but the market doesn't care right now. i'm starting to believe the financials still have a good scare in them left for us, but i believe the market is showing some signs of moving on without them. i don't know how far it can go given that the main engine of the economy, the spending power of the consumer, is also impaired, but it is a positive to see that one more problem is beginning to take care of itself.

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