Waiting for Financials' Other Shoe to Drop

Bill Cara

I’m rushing for a 10:00am meeting, so I don’t have time to think much about markets this morning. I will leave you with the thought that I do anticipate another shoe to drop at Humungous Bank & Broker (HB&B). With foreclosures of homes at all-time record highs, the special loans groups at HB&B are working overtime.

What this means is that the bank’s capital must be protected ahead of any client. Why else do you see a Lehman (LEH) ready to sell off their profitable Neuberger division, or a SunTrust Bank (STI) of Atlanta selling off their original holdings of Coca-Cola (KO), or Merrill (MER) selling a big piece of Bloomberg?

Does anybody really think these decisions are being made lightly? The banks are toast unless they can wait the economy downturn through to where housing prices improve and their asset-backed mortgage holdings take on higher valuations.

The issues there are probably 40% worked out. If HB&B was to collectively write-off these dubious holdings today, the industry would lose many of its key players. I still think there is a likelihood of that happening, so it is advisable to continue to avoid the Financials (banks, broker-dealers and insurance companies).

Is there a play yet for the commodities? I don’t think so. Demand destruction is occurring world-wide. But, if, as and when there are major shake-outs like what happened last week and Monday, the larger and longer-term oriented accounts will buy those dips. That will lead to short-covering, and modestly higher prices in the very short-term. Then reality will set in again, and prices will continue to fall.

At the cycle bottom, I anticipate the $WTIC crude oil price to hit or exceed a low of $85/bbl. We still have a way to go. So, I’m not rushing into gold at this point, but I am watching the Toronto Venture Board companies (for more than short-covering) and the $USD:GLD linkage as well as other commodity prices, and the prices of the major miners (Xstrata (XSRAF.PK), BHP (BHP), Rio Tinto (RTP), CVRD (RIO), Teck (TCK)).

I think we’ll see a significant buying opportunity for precious metals and oil before the end of the calendar year.