The news today about Bank of America (BAC) (bailout) and Citigroup (C) (restructuring) has both names indicated higher along with the broader market but this entire episode continues to fascinate. The short term implication is probably positive (said with not much conviction) but the longer term implication is…well…what exactly is it?
Regardless of what you thought about Fannie Mae (FNM) and Freddie Mac (FRE) they were vital cogs in the machine and now they are gone (not really gone but much different than they were). The biggest banks from two years ago have failed one way or another. The biggest investment banks have either failed or technically are no longer investment banks. This has forced the government to have a large role in fixing things–or more correctly trying to fix things.
If it is correct to say that the US financial system has collapsed (I will let others decide if that description is correct) we should perhaps count ourselves lucky that stocks have not dropped more. Obviously some folks are calling for a much larger decline still to come. I do not think there will be new lows that are meaningful but of course any opinion like that can be wrong. I still believe in a large bear market rally to come and a run down toward the lows after that (maybe the run up to 931 was the rally–smaller than I would have thought– but I don’t think so).
One other reason why I don’t think we go dramatically lower than the lows already in is that the shock factor is now gone. Asset prices have plummeted, institutions have failed or been bailed out, foreclosures have gone way up as has unemployment. If the shock factor is gone then there likely would be less of an emotional response which in turn would mean the lows for equities are in even if we churn around the lows for a while to come.
Or not. What do you think?