Scent of blood in the Bear markets
The bears have got investors trapped up trees on both sides of the Atlantic – and it could be some time before they wander off back into the woods in which they lurk, ever watchful for a signal to sell equities.
The current wave of panic that turned Wall Street and London red on Friday was sparked by fears that the famous Fannie Mae and her younger sibling Freddie Mac had gone bust.
For the unitiated, Fannie and Freddie are partly-privatised federal mortgage agencies that between them prop up half of America’s $12 trillion mortgage market.
Fears that they had run out of cash in the global credit meltdown caused by the irremediable collapse of the US subprime lending market were compounded by the theory that US Treasury secretary Hank Paulson was in no mood to bail them out with taxpayers’ dollars.
Apparently, so the “thinking” went, he’s opposed to propping up ailing banks on the grounds that it creates “moral hazard”, i.e. the belief among others that they go on trading recklessly because Uncle Sam’s behind them with bucket-loads of greenbacks.
That’s not the case, according to reports out of Washington. They claimed that Mr Paulson was hammering together a package that would help Fannie and Freddie short of outright re-nationalisation of the former federal agencies.
An announcement was expected before Wall Street gets down to business at 2.30 pm our time today. That, the pundits were claiming yesterday, would reassure the markets and calm things down.
As heck as like. The bears have tasted fresh meat and are likely to go on gorging for some time to come.
Anyway, the Far Eastern markets will get a chance to panic on Monday and send London into another flat spin.
Besides, Wall Street faces yet more bad news this week with the major banks predicted to be lining up to announce a fresh tranch of multi-billion dollar write-offs of sub-prime debt.
As if that’s not bad enough, the markets seem simply to have no faith now in the ability of central banks and treasuries to come up with anything remotely effective in the current febrile climate.
Mr Paulson will probably end up looking like a man standing out in a monsoon tearing up $1,000 bills.
Of course, there’s always a chance that enough traders will decide the sell-offs gone far enough and begin buying bargains. If they do, the chances are it will be no more than the fabled “dead cat bounce” that send a market up 50 points or so before fading away.
Sorry if I’ve spoiled your breakfast (mine won’t have gone down too well either), but here’s something that might cheer you up.
Fidelty guru Anthony Bolton says he believes the equities slump hasn’t much further to run.
He is advising punters to get out of over-sold commodity stocks and put their money into, of all things, banks – at least, those that have successfully restored their balance sheets.
Mr Bolton managed to turn a notional £1,000 investment into £147,000 over 28 years at Fidelity so if anybody can tame those bears, he can.