Financial Stocks Withering Away
Wednesday, November 7th, 2007
By Michael Lombardi, MBA for Profit Confidential
It started as a “subprime” problem, Wall Street told us. Consumers who didn’t really qualify for mortgages to buy homes were doing so anyway thanks to ingenious new mortgage instruments like “non-paper confirmation of income” home loan applications and ARMs that made payments for the first couple of years so low almost everyone qualified.
Then we were told the subprime mess might be a bit bigger than was first thought. People seeking higher rates of return on their money were sold pieces of pools of mortgages that were really a bunch of subprime mortgages combined into one big fund.
Merrill Lynch & Co., Inc. (NYSE/MER), the world’s largest stock brokerage, was the first big financial institution to come out and report it had exposure to the “credit crisis” in the financial markets stemming from subprime mortgages. Merrill announced it needs to write down $8.0 billion of its investments. The company then fired its leader, Stan O’Neal.
Now we hear the subprime mess is claiming banks as its next victims. Late last week, Citigroup, Inc. (NYSE/C), the largest U.S. bank, announced that it would take a hit of between $8.0 billion and $11.0 billion on its securities. Citigroup’s CEO, Chuck Prince, has stepped down. Monday, Citigroup stock fell five percent in one single day.
Remember when Greenspan was telling investors that the slowdown in the housing market would not affect the economy? Remember when Wall Street was telling us the subprime problem was isolated to risky investments? I didn’t know Merrill Lynch and Citigroup stock were so risky. Now we have Citigroup issuing a statement saying “…significant uncertainty continues to prevail in the financial markets.”
As I wrote three years ago, the construction industry is the backbone of the U.S. economy… always has been. We can’t have a slowdown in housing without the remainder of the U.S. economy not feeling it big-time. But the problems from the housing bust are only now starting to affect other parts of the economy. I’d stay clear of the big financial stocks, including the banks, as much as I’d stay clear of the new housing stocks.
Next Post: Major Moneymaker Belies its Boring ImagePrevious Post: Market Problems Could Mean Drop in Consumer Spending
Tags: housing market, U.S. economy
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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
