Catching A Falling Knife?
Posted
Mar 13 2008, 09:11 AM
by
Richard Schwartz
THROWING GOOD MONEY AFTER BAD. Let’s think back some so as not to lose perspective. Where to start? Yep, right at the top of the five year bull market and the top of the private equity boom.
- June 21st, 2007: CHINA backed Blackstone Group’s IPO at $31 back with $3 billion last June. Yesterday BX closed at $16.47 so China’s stake is now worth about half. Joe Lewis, some self made billionaire, bought shares of Bear Stearns back last September at over $100; yesterday BSC closed at $61.58. Others saw Citigroup at a bargain below $35 and as “too big to fail” and jumped on board; C closed yesterday at $21.21. This buying of the banks “temporarily depressed” banks continued with who knows how many banks raising cash from new investors. UBS in Switzerland, Deutsche Bank in Germany, banks in Australia, France, England, Japan and elsewhere all found new investors to help them improve their balance sheets. Sovereign Wealth Funds (SWF) from Singapore, the Middle East, etc. have all piled in to grab depressed stock prices in financials and are now under water. Ambac Financial just raised big money selling shares at $6.75, way below the going market price of $9.50 last Friday and in spite Tuesday’s gigundo general stock market rally, has already given back most of that premium with ABK closing yesterday at $6.86. All of these bulging-with-riches governments have miscalculated badly, at least so far. Seems like the rest of us should learn some lessons from these guys. Hey, it’s in all the stock market history books, this nutso strategy of trying to “catching a falling knife”. And we all know this common sense rule, be we investors or not. What’s it called? Yep, something like: “Fools rush in where wise men dare not tread.” Schwartz View: So I ask you, isn’t our Federal Reserve Bank now doing exactly the same thing? I know, they do have some dual mandate (impossible; probably imposed by Congress, back in 1977 I believe) to help where they can but they are THE BANK after all so their first mandate should always be to keep our currency strong whether it means putting us into a recession or not. I mean former Fed Chairman Paul Volker put us into recession for the longer term good of the country, right? He raised interest rates dramatically. And now he’s looked back upon 25 years later as the man who vanquished runaway inflation. I just think this Fed trying to backstop the economy and thus letting inflation rage is pursuing exactly the wrong strategy. As some others have been saying as well. This chorus may grow louder if things keep getting worse. With the US dollar’s awful reaction and now the global stock market’s reaction to Tuesday’s Fed move, it sure seems like everyone has lost confidence in “Helicopter Ben” and our central bank. Thus, let me propose …
Filed under: Principles of the Stock Market, Richard Schwartz, Trading, Value View, Investing Strategies, US Dollar, Keys to the Market, Distribution, The Fed, Portfolio Strategy, Schwartz Rules, Historical Perspectve, Perspective