Thinking about picking up some shares of "venerable financial institutions" like Lehman Brothers Holdings (NYSE: LEH), Merrill Lynch & Co. (NYSE: MER), Citigroup Inc (NYSE: C) and Washington Mutual Co (NYSE: WM)? Think again.
As Bill Miller of Legg Mason Value Trust has learned the hard way, just because a stock looks like it's undervalued doesn't mean it won't keep getting more undervalued. Especially when there's the risk of an all-out catastrophe a la Bear Stearns thanks to these companies' incestuous affair with leverage.
Take Lehman in particular, it's trying desperately to raise capital, by any means necessary, but can it go to the multi-trillion hedge fund industry? No. Hedge funds have trillions because they're smart. They know at this point that Lehman is a longshot. So, Lehman must negotiate with smallish foreign countries that are trying to get some good old American power and even there it's getting rejected!
That's just sad.
Forget that the management at these companies is horrendous -- as evidenced by their "investments" (they're not Goldman Sachs Group (NYSE: GS) caliber) -- the business outlook is downright ugly.
Try to follow my thinking: with the somewhat absurd/unfair bailout of Fannie Mae (NYSE: FNM) / Freddie Mac (NYSE: FRE) guaranteeing an extended housing downturn -- yes, you can forget about a 2009 or 2010 recovery as reducing their business 10% each year starting in 2010 means housing is going to be in the dumps longer -- consumers won't be as debt-happy as they have been in the past. So our economy won't be its true debt-financed-strong-self, meaning investment-making, financing deals, IPOs and mergers and acquisitions of all kinds will be depressed, meaning less fees and commissions for the aforementioned companies.
Yes, it's ugly, but it's basic economics. No, there's no guarantee that everything will be as bleak as the picture I just painted, so I wouldn't short sell here either -- debt-based economies can and have strengthened when least expected.
Timothy Sykes writes the blog timothysykes.com, is a former hedge fund manager, star of the TV show Wall Street Warriors and author of the book, An American Hedge Fund: How I Made $2 Million as a Stock Operator & Created a Hedge Fund
U.S. Justice Department turns an eye on the telecoms
Serious Money: Three stocks that beat the market
Closing Bell: The wishy-washy return to Q3 (AA, DDUP, EMC, DNDN, CVX, FSLR, GS)
