Financials recovery may take 25 years

[S.C. Joe]

This seems a little longer than the 3 to 5 years some Terbbies members have been saying..

http://www.reuters.com/article/HedgeFundsandPrivateEquity08/idUSL0986422020080409

By Simon Challis

LONDON (Reuters) - Financial stocks, which have taken a pounding from the subprime mortgage meltdown, could take up to 25 years to recover to their pre-credit crisis levels, a senior hedge fund manager said on Wednesday.

Speaking at the Reuters Hedge Fund & Private Equity Summit in London, Hugh Hendry, Chief Investment Officer of Eclectica Asset Management, said financial stocks were set to fall further after the credit crisis burst a 16 year bubble in their prices last year.

He predicted Citigroup (C.N: Quote, Profile, Research), the largest U.S. bank and a major casualty of the crisis, could fall below $10 a share, less than a third of its 150-day moving average price of $32.82, as the credit crisis unravels further.

"When you have a bubble, the other side is profoundly bad," Hendry said.

"The origination of the bubble in U.S. financing is circa 1991, with the bailout of Citigroup. It is my presumption that we will return to such levels. So that means sub-$10 for Citigroup (C.N: Quote, Profile, Research)," said Hendry.

When a bubble is created in a sector's stocks, which sees their weighting dominate the index, it typically takes a generation, or around quarter of the century for them to recover to their pre-bubble levels, he said.

"In 1980 the oil sector occupied about a third of the market capitalization of the S&P. The next 25 years were scorched earth," said Hendry.

The financial sector was the biggest sector in the S&P 500, representing around 20 percent of the index last September, as the credit crunch began to bite

The recovery will be a slow and painful process, said Hendry, citing technology firms such as Microsoft (MSFT.O: Quote, Profile, Research), which are trading at the same levels as they did back in 1999, before the tech bubble burst the following year. He said he was far more optimistic over the outlook for soft commodity prices.

"It takes time ... healing the process. The financials have just entered that long chamber of time," he said.

"There will be violent rallies, and those might last for up to a year. But you know when liquidity comes back into a market it seeks out not the laggards but the leaders. The leaders are fertilizer stocks."

 

[LatinDancer]

Always take these pronouncements with a grain of salt. There is speculation that Bear Stearns was partially brought down by rumours, and a declining price benefits investors shorting the stock. The buy and hold strategy will not create wealth for you these days, but buying into dips and selling into short term rallies will.

 

[xarir]

Personally I'd be happy if Citigroup's stock blew up and came crashing down. It would represent a wonderful, perhaps even once-in-a-lifetime opportunity to buy it cheap and benefit from a lot of upside later on.

You have to remember that a lot of companies are writing off bad credit. In many cases (but certainly not all) there's a difference between an actual loss and simply not making as much money as planned.

Let's say you loan money to someone (mortgage) and you expect 10 periodic payments of $10. You are expecting $100 over the life of this mortgage so you might capitalize the asset on your books as $100. Let's say that for the first 2 periods all is well, but on the third period things crash (subprime meltdown). There's now no chance you'll ever collect on the rest of the mortgage so you write it off. The books show a loss of $80, but you never had that in the first place so it's not like money is flying out the door. In fact, you actually made $20 earlier on so you have some profit. It's just that from an accounting view, you have impaired assets and that's Really Very Bad.

Of course, not every case is like this - many companies actually do have money flying out the door never to return. But not every company is losing money despite the write downs.

 

[CUTTERBUCK]

Frankly, I don't give a rats ass what you financial wiz's have to say. I'm just a regular working guy, 40 hours/week, little or no stress. I make a decent living and have enough disposable income to enjoy the hobby. You guys can keep your stress filled lives.

 

[S.C. Joe]

Personally I'd be happy if Citigroup's stock blew up and came crashing down. It would represent a wonderful, perhaps even once-in-a-lifetime opportunity to buy it cheap and benefit from a lot of upside later on.

Well theres been 2 "once-in-a-lifetime" buys just last month. Theres was Bear Streans-bsc-which went under $3 a share to over $13 a share in one week. Then there was Lehman Brothers-leh-which went as low as $20.25 a share to over $48 a share in the same week-believe it was 3 days.

 

[dudey31]

Personally I'd be happy if Citigroup's stock blew up and came crashing down. It would represent a wonderful, perhaps even once-in-a-lifetime opportunity to buy it cheap and benefit from a lot of upside later on.

You have to remember that a lot of companies are writing off bad credit. In many cases (but certainly not all) there's a difference between an actual loss and simply not making as much money as planned.

Let's say you loan money to someone (mortgage) and you expect 10 periodic payments of $10. You are expecting $100 over the life of this mortgage so you might capitalize the asset on your books as $100. Let's say that for the first 2 periods all is well, but on the third period things crash (subprime meltdown). There's now no chance you'll ever collect on the rest of the mortgage so you write it off. The books show a loss of $80, but you never had that in the first place so it's not like money is flying out the door. In fact, you actually made $20 earlier on so you have some profit. It's just that from an accounting view, you have impaired assets and that's Really Very Bad.

Of course, not every case is like this - many companies actually do have money flying out the door never to return. But not every company is losing money despite the write downs.

Actually the money went out the door initially when the loan was made. Writing off the asset or loan will affect the p/l subsequently.

 

[Serpent]

Frankly, I don't give a rats ass what you financial wiz's have to say. I'm just a regular working guy, 40 hours/week, little or no stress. I make a decent living and have enough disposable income to enjoy the hobby. You guys can keep your stress filled lives.

A bad economy...well..now, a bad GLOBAL economy impacts all "regular working guys". More so than the fat cats since they have piles of cash to get through a major recession.

 

[jwmorrice]

Well theres been 2 "once-in-a-lifetime" buys just last month. Theres was Bear Streans-bsc-which went under $3 a share to over $13 a share in one week. Then there was Lehman Brothers-leh-which went as low as $20.25 a share to over $48 a share in the same week-believe it was 3 days.

Of course, that was then and this is now. The following Reuters story would seem to portend unsettled days coming to Lehman Brothers.

jwm

Lehman liquidates three funds: filing

2 hours, 11 minutes ago

Lehman Brothers Holdings Inc (LEH.N) has liquidated three floundering investment funds that lost value and ended up taking $1 billion of assets onto its balance sheet, according to a filing with the U.S. Securities and Exchange Commission.

The bank blamed the liquidation on "market disruptions that occurred in the second half of the 2007 fiscal year and further deterioration in the 2008 quarter," according to the quarterly filing on Wednesday.

In Europe, Lehman Brothers shares were down 4.1 percent from their last close in Frankfurt at 25.50 euros (LHMH.F).

Lehman's announcement comes at a time when losses from subprime and other mortgages have rocked several banks and dealt a blow to their balance sheets.

 

[Mia.Colpa]

This seems a little longer than the 3 to 5 years some Terbbies members have been saying..

Fine by me, íf you know what you're doing, you can always make money, whether in an up or down market.
Personally, don't agree with the Reuter's report, 25 years is a long way out for anyone to forecast with any confidence. Too much chart analysis I think.

 

[S.C. Joe]

The buy and hold strategy will not create wealth for you these days, but buying into dips and selling into short term rallies will.

This is good advice in todays market.

 

[Gyaos]

How long did Japan take?

 

[fuji]

The buy and hold strategy will not create wealth for you these days, but buying into dips and selling into short term rallies will.

Do you have any proof? Or is that opinion? Historically buying stocks that are falling and selling stocks that have been rising has been a horrendously bad strategy. What makes you think that's changed?

 

[jwmorrice]

Here's an article from the Globe and Mail that bears on the discussion.

jwm

Long-term foreign exposure? Good plan, bad results

ROB CARRICK
April 10, 2008 at 6:00 AM EDT

Nothing says futility like an investment in an equity fund that lags the returns of five-year guaranteed investment certificates.

The five-year GIC is the default investment of the risk-averse members of our population. Returns are low, but the chances of losing money are as close to zero as you can get without actually using the term risk-free.

Now, what if you take on more risk by investing in equity funds? You'd, of course, expect to do better than a five-year GIC, while being aware of the risk that you could do worse. The longer you invest, it seems logical to say, the better your chances of beating the five-year GIC.

This is what the mutual fund industry would tell you. Long-term investing is the way to go because it allows the stock market's long-term upward trend to more than offset those periodic bad patches like we've seen lately. Every so often, however, the conventional wisdom in investing runs into harsh reality.

One of those times occurred recently when a reader e-mailed to draw attention to the fact that the $3.3-billion Templeton Growth Fund has delivered worse returns over the past 10 years than five-year GICs.

It's true, but why single out Templeton Growth? Almost all mutual funds in the global equity category have 10-year compound average annual returns that are less than what you could have received with a bank GIC, and the same goes for U.S. equity funds as well.

That's at posted five-year rates, mind you. You probably could have done even better with a GIC by asking for a rate bonus. But we digress. At issue is the fact that there are people out there who have done everything the experts advise with mutual funds – hold for the long term and diversify internationally – and been rewarded with returns that are out-and-out rotten.

This is not meant as a repudiation of long-term, buy-and-hold investing, which remains the most sensible approach for a majority of people. But it is a reality check about the level of patience and fortitude required when investing in the stock markets.

If you purchased a five-year GIC 10 years ago at posted rates and then rolled it over into a new one at maturity, you'd have an average return of 3.9 per cent. Just seven of 51 global equity funds managed to beat this return, and just two of 47 U.S. equity funds.

Templeton Growth averaged just 1.45 per cent a year for the 10 years to March 31, but it's far from the worst of its kind. The $1.5-billion Fidelity Global B Fund gained just 0.4 per cent annually, while the $977-million TD Global Select Fund made 0.04 per cent a year for the past decade. In dollar terms, a $1,000 investment made 10 years ago in this fund would have gained – wait for it – $4.10.

It may sound a little unfair to pick on global and U.S. funds because their returns have been ruined less by bad investments or falling stock markets than the rise of the Canadian dollar against its U.S. counterpart and other global currencies. The more our dollar rises, the more it undermines the returns Canadians get from other stock markets.

And yet it's often said that the impact of currency moves on fund returns ends up neutral if you invest for the long term. In fact, the Canadian dollar was a slow but steady loser for the first half of the past 10-year period before beginning its amazing rise. Currency hurt foreign investing returns more than it helped over the past 10 years, but it wasn't a constant drag by any means.

The next 10 years may well turn out a lot better for global funds, especially given the fact that the Canadian dollar is at a high point with seemingly little sustainable room to climb. Or not. Maybe the commodity-fuelled Canadian market will continue to outperform for a while longer. Care to guess the right outcome? Some investors and advisers will get the answer right, but the odds against it are steep. A better approach: Stay invested in the stock markets, stay diversified in global terms and stay tuned. If you look at how global funds have done in the past 30 days, you'll see some very encouraging numbers in some cases.

No question, you should absolutely expect good results over a decade, because 10 years is long term by any definition. Way back in 1998, the Monica Lewinsky scandal was in full swing, Titanic won the Oscar for best picture and America Online acquired Netscape. Talk about ancient history.

And what of those investors who own global equity funds that have been thrashed by virtually risk-free GICs? Let's just say they've had a lesson in how the reality of investing means bad things sometimes happen to investors with the right plan.

 

[great bear]

For once its really nice to see the bears winning.

 

[Rockslinger]

The Canadian banks are an oligopoly. The Canadian government will never let a major bank fail. Canada has a trade AND a fiscal surplus (unlike the U.S.). Inflation is low. The retail arms of the Canadian banks are a "cash cow." Don't worry, be happy. Query: What should I do with my "once in a lifetime" acquisition of Nortel stock?

 

[JohnLarue]

The Canadian banks are an oligopoly. The Canadian government will never let a major bank fail. Canada has a trade AND a fiscal surplus (unlike the U.S.). Inflation is low. The retail arms of the Canadian banks are a "cash cow." Don't worry, be happy. Query: What should I do with my "once in a lifetime" acquisition of Nortel stock?

Nortel has destroyed way more wealth than it has created for investors.
(Insiders & investment bankers have made a ton of $ on this dog)
It do not have a track record of consistently growing revenue, earnings and cash flow
It does not have a competitive advantage. (Cisco does)

It amazes me how many Canadians love to spend time (and worse their $ on this stock), hoping to buy it cheap & get some of the magic back (back to 1999 price levels- ain't going to happen)

They have had more re-orgs and management changes than Carters has little liver pills

There are so many other well run companies that consistently grow revenue, earnings and cashflow and have a competitive advantage.

Nortel is worse than a dog stock, its a dog with flees

 

[JohnLarue]

The Canadian banks are an oligopoly. The Canadian government will never let a major bank fail. Canada has a trade AND a fiscal surplus (unlike the U.S.). Inflation is low. The retail arms of the Canadian banks are a "cash cow." Don't worry, be happy. Query: What should I do with my "once in a lifetime" acquisition of Nortel stock?

Nortel has destroyed way more wealth than it has created for investors.
(Insiders & investment bankers have made a ton of $ on this dog)
It do not have a track record of consistently growing revenue, earnings and cash flow
It does not have a competitive advantage. (Cisco does)

It amazes me how many Canadians love to spend time (and worse their $ on this stock), hoping to buy it cheap & get some of the magic back (back to 1999 price levels- ain't going to happen)

They have had more re-orgs and management changes than Carters has little liver pills

There are so many other well run companies that consistently grow revenue, earnings and cashflow and have a competitive advantage.

Nortel is worse than a dog stock, its a dog with flees..


Bye the way 25 years is a very long time
If it takes that long for the US financial system to repair itself, the whole world will have major economic problems.

The guy who wrote the article is hedge fund guy. He is probably short the financials and is promoting doom & gloom in order to make a quick buck (shameless )

 

[S.C. Joe]

It took gold that long to come back-and in 1979 dollars its still not back to were the high was. Tech stocks still are not were they where in the year 2000, sure tech stocks will break the 2000 highs but when, 20-40 more years from now?

25 years is a long long time, we will see.

 

[Rockslinger]

It took gold that long to come back-and in 1979 dollars its still not back to were the high was. Tech stocks still are not were they where in the year 2000.

Oil also took 25 years to recover from its 1978 price. Toronto real estate was in the dumpster for 10 years from 1989 to 1998. The Japanese market still has not recover its 1989 high.

What is important to remember is that the Canadian banks have a perennial money making machine in their retail network. It is a virtual license to print money. CIBC and BMO would be well advised to rid themselves of their capital markets group and just focus on retail.

 

[flyingiguana]

Oil also took 25 years to recover from its 1978 price. Toronto real estate was in the dumpster for 10 years from 1989 to 1998. The Japanese market still has not recover its 1989 high.

What is important to remember is that the Canadian banks have a perennial money making machine in their retail network. It is a virtual license to print money. CIBC and BMO would be well advised to rid themselves of their capital markets group and just focus on retail.

no retail bank should be allowed to do investment banking. abolishing the glass steigal act was part of the reason so many american banks are having major problems.

td bank looks like they're in decent shape though, as are most canadian banks.