Insights & Advice


It’s Nationalization—No Matter What They Call It

Taxpayers now own a 36% stake in Citibank. The deal was announced before the markets opened Friday. Investors expressed their unhappiness and promptly sold the averages down. The Dow and the S&P500 fell to new lows in the morning with the NASDAQ not far behind. Still, Citibank is one of those blessed with the “Too big to fail” sign above its marquee so given the choice between the “N” word and bankruptcy it was a foregone conclusion what course the government would take.

We discussed this eventuality last week. Of course it won’t be called nationalization and it won’t involve any more bail-out money quite yet. The deal will convert preferred shares that the Treasury already holds in the bank for common shares. In theory, this paper shuffle will better protect shareholders (taxpayers) against future losses and improve the bank’s capital base. The Sovereign Wealth Fund of the Government of Singapore will also convert its shares bringing its stake in Citi up to 11%. On the news the shares almost halved and are now selling under $2.00.

Hopefully, you are on the sidelines or invested in bonds and income funds because this week you have to pity the poor day trader. Monday saw the S&P500 and Dow make a 12 -year low only to explode upward on Tuesday gaining back almost 4% (credited to a calming speech by Federal Reserve Chairman Ben Bernanke). It was what we on Wall Street call an “oversold bounce”. Since it was expected and overdue, traders sold stocks short into the move higher. Those who believed the markets would continue upward chased stocks and were once again disappointed. Both Wednesday and Thursday were down. By Friday we were lower than we were last Friday.

Gold and silver, the safe haven investments I recommended last week, pulled back as expected with gold dropping from $1,000 /oz. to the mid-940s while silver had a commensurate correction. Unlike stocks which are in a severe bear market, gold and silver are bull market commodities. Bullion will have periodic short, sharp pullbacks like this one and then move higher. Determining an entry point can be difficult.

Gold could easily decline to $900/oz. or slightly below that. Silver could drop to $12.25/oz. The best strategy is to buy on pullbacks. For example, if I had $100 to invest I would buy $25 worth now and then if it moves lower buy another $25 and so on.

The U.S. dollar, which I also recommended as a safe haven in this environment had a good week, up 1.8%. The greenback is still the currency of choice for most foreign investors in times of uncertainty.

The Obama budget proposals announced Thursday will mean higher taxes for upper-income earners as well as for businesses. Although it was expected, higher taxes never sit well with Wall Street. Hedge funds, private equity funds, energy exploration companies, multinationals, health care, aerospace and defense companies are some of the sectors which will feel the brunt of higher taxes.

The president’s national health care agenda, his intention to allow consumers to buy cheaper drugs from abroad and to allow competitive bidding among health insurers who want to offer Medicare plans could open a Pandora’s Box among the health care sector. I can recall the early nineties when First Lady Hillary Clinton proposed health care reform. It triggered a multi-year decline and a bear market among health care stocks.

Healthcare is considered a defensive sector in recessions since it is one of the few areas where consumers will continue to spend out of necessity. In this correction investors have over weighted health care in their portfolios. So far we’ve seen two down days in a row. A continued sell-off in healthcare would be bad news for stock market participants.

As for the coming week I expect more of the same—volatility, insecurity and downward bias. Keep your eye on precious metals for additional opportunities to buy at lower prices. Overall, since last week, both the Dow and the S&P500 closed at new lows while the NASDAQ is a mere 62 points from breaking its November low. Sure, we can have another rally at any moment since the markets tend to bounce off new lows like tennis balls on a hard court. But don’t be fooled, there are more new lows in the offing.

Posted in A Few Dollars More, At the Market