A Contrarian View on Wall Street’s New Best Friend
Wednesday, March 26th, 2008
By Michael Lombardi, MBA for Profit Confidential
Remember when Goldman Sachs racked up $10.0 billion in one year and paid out an average of $622,000 to its employees in bonuses? Well, it wasn’t that long ago. It was only 2006.
Fast-forward two short years and times are very different. There won’t be any big, fat bonuses on Wall Street this year. In the last nine months, large financial institutions have laid off over 34,000 people previously employed at stock brokerages, regular banks and merchant/investment banks. Rumor has it that 20,000 more layoffs are in the works. The mood cannot be good on Wall Street. Pessimism reigns.
In terms of the biggest layoffs, so far they have come from Citigroup (with 6,000 jobs gone), Lehman Brothers (cut 5,000 employees) and Bank of America (with 3,500 jobs gone). I doubt JP Morgan needs all 14,000 Bear Sterns employees either.
The last time Wall Street cut so many jobs was after the tech bubble bust in 1999, less than 10 years ago. Of course, Wall Street recovered from the tech bubble. They went from peddling tech stocks to mortgage backed securities. Next? (Once gold hits $2,000 to $3,000 per ounce, Wall Street will likely be selling gold-backed securities and that’s when investors like me and you will know it is time to get out of gold!)
Regardless of what Wall Street peddles, they have a new ally: the Federal Reserve. In my study of history, I’ve never seen the Fed come to the rescue of Wall Street like it has now. Buying mortgage-backed paper from banks and swapping it out for government treasuries? Reducing interest rates on a dime? Even saving a stock brokerage? Too bad the Robber Barons of the later 1800s aren’t here to see this. Wall Street has a new best friend: the Fed.
And that brings me to the stock market. In spite of all the bad news one hears, the stock market is not moving below its January 2008 lows. In fact, the stock market keeps moving further up and away from its January lows.
What does this action by the stock market tell me?
It tells me that the stock market has discounted the worse for 2008. I’m a big believer in the stock market being the best leading indicator of events to happen six months to one year away. Right now, the market is telling us that the worse is over. You can see it in the reverse of highs vs. lows on the NYSE. Look at the home- building stocks… they are staging a rebound, too.
So while pessimism about the economy rises daily… and while the economic figures released each week are more dismal… I’m taking the contrarian view again. (Hey, when I was bearish in 2006 and 2007, I was a lone wolf. Hence, I’m getting used to it. And I don’t mind running against the crowd, because the general consensus is usually wrong anyway.) For now, the stock market tells me that the worse for the economy for 2008 is over.
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
