We are heading for a crisis of confidence, confidence in the core of the U.S. economy, the capitalist way of life, starting with financial institutions and permeating every other industry from autos to homebuilders. Investors wonder if institutions as we know them will survive. Will foreign firms buy every American company? Or will they dry up and blow away? Will all the banks shut down? Stock prices suggest many investors are thinking maybe all of these will happen.
And why not? Ford Motor (NYSE: F) announced it won't introduce a new F-150 truck, the best selling truck of all time. The reason: there are acres and acres of old F-150s sitting on dealer lots that no one wants. General Motors (NYSE: GM) is shutting truck plants longer than usual since very few of its big moneymakers are moving off lots. Homebuilders are showing huge losses and all of them say there is no light at the end of this dark tunnel. Bank news gets worse each day, with headlines screaming that we aren't near to knowing how bad this mortgage and credit crisis really is.
There is no shelter in this storm. Everywhere investors look, they see more dark clouds. Most of them believe that it gets darkest just before it get pitch black. Is the American dream gone, turned into an economic nightmare, the likes of which we haven't seen since the Depression?
Hardly. During the depression, over 30% of the workforce wasn't working. Prices were constantly going lower as fewer and fewer goods were sold. All the banks were shut for a "Bank Holiday" for three days shortly after Roosevelt was elected. People were roaming the country, looking for a job, anything to keep food on the table for their families. If the American dream were going to die, it would have done so in the late 30's and early 40's. But it didn't.
And did they return. After the war, the boom exploded. Not a bomb boom, but an economic boom. The U.S. experienced growth that lasted for decades. Once the boom was off the growth, regular economic cycles returned. The most recent boom was in the 90's. Now we're going through the downside, a normal occurrence when exuberance becomes irrational.
Still, there are already signs of small lights in the vast darkness. When the news came out that house prices were down 15% compared to a year before, housing stocks like luxury builder Toll Brothers and KBH (entry level builder) went higher. Why? Because some investors believe the bottom may be nearing or in fact, may be here. They want to be on board when the good news starts hitting, the news that says sales are heading higher, inventories lower, with backlogs building. Those headlines will come. Don't know when, but they're closer to being here than three months ago.
The same can be said for banks. After the second quarter earnings are released in July and new capital raised, look for bank stocks to stop going down. They may not rally right back because the potential for more losses is still a threat. Some banks won't make it. They shouldn't. But the regulators are all over them right now. If they determine a bank isn't well managed or has too much risk, they will talk with stronger banks to buy the weak one. The regulators are not going to let any large banks go under. The smaller ones that do, will be in such bad straits that no other bank would buy them. They won't have enough good loans or deposits for an acquirer to pay any amount of money for them. Those are very few. Most banks, especially community banks, have a deposit gathering base in many neighborhoods that other banks want and are willing to pay for them. Banks won't be allowed to fail to any degree that would create a crisis of confidence.
The U.S. has lived through much, much worse times than we have now. Investors are beginning to sense that, even among all the gloom and doom in headlines. Maybe the bottom has been reached. Or maybe we're only very close to it. In either case, smart investors are coming back into the most battered industries and buying.