Federal Reserve News: Financial Stocks Could Be In Trouble

by | Jul 31, 2008 | Asset Management, Stock Market Comments

“Mr. Valentine has set the price!”

Or, in this case Mr. Bernanke sets the price.

This week the Federal Reserve announced that the “open spigot” of money available to investment banks will be closing January 30, 2009. This is six months away.

What this means is that the access to cash will be closing. What this means to you is financial stocks — particularly the bigger banks and brokerage firms — might either be putting a bottom in place, or falling off the cliff in the coming weeks or months. And while we’ve avoided financial stocks for the past year-plus, the financial sector still remains one of the largest cogs in the S&P 500. So, it could be a turning point. We’ll see.

Knowing that this window is soon closing, banks and brokerage firms will have the impetus to write off anything of a questionable nature. So it’s very possible we can see massively larger write-downs an extremely large quarterly losses for some of these brokerage firms and banks, as they race to meet this new deadline in six months. They’ve had access to these funds to help provide liquidity and to help in avoiding a Bear Stearns-like collapse.

While I’m not going to predict the future, this could be the “end of the bad news” for some of these firms. There have been several times in the last 25 years with these kind of events have marked turning points for banks and brokers. The Latin America debt problem in the 80s, recessions, Long Term Capital Management, the currency crisis in 1998, etc.

Please understand, in no way does this event — or this deadline — lower the risk that comes with investing in this financial and Wall Street sector. It’s like skating on thin ice: it’s a great ride, until it’s over. And then it’s really over.

Why did I use the headline “Mr. Valentine has set the price”?

This is a line from the 1983 movie “Trading Places” with Dan Aykroyd and Eddie Murphy. As Billy Ray Valentine, Eddie Murphy explains — on his first day on the job — why he’s picked a price to buy pork bellies. And Mortimer and Randolph Duke advise their clients interested in purchasing pork bellies to buy at the price Valentine has set.

Likewise, Ben Bernanke has essentially told Wall Street that his “free lunch” will be ending January 30, 2009.

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