Commodities and financial companies were hit hard earlier this week, with major banks like Bank of America (BAC), Citigroup (C) and JPMorgan Chase & CO. (JPM) in particular getting shellacked due to a new set of downgrades from ace Oppenheimer analyst Meredith Whitney.
As I mentioned in a Twitter post on Monday, another element weighing on financial stocks was a letter sent today by incoming Council of Economic Advisors chief Larry Summers to the Congressional leadership.
He told Congress that the Obama Administration would conduct much more stringent oversight on banks receiving billions of dollars from the Treasury under the Troubled Asset Recovery Program.
The Obama team wants to restrict dividend payments, executive compensation, leverage and buybacks and conduct more regulation overall. From a public policy standpoint this is great, but from an investment perspective it will only serve to further weaken banks’ ability to attract and retain shareholders.
Another blow hitting U.S. and Asian stocks earlier this week came from Europe. The French, Germans and even many British tend to take a longer break than Americans for the New Year holiday, I am told, so their trading desks only revved up for 2009 on Monday.
They apparently all decided to sell the recent rally as soon as they got in the office, and kept at the task all day. Their own major indexes sank heavily this week as well, as all the major country ETFs — United Kingdom, Germany, Spain, Netherlands, Switzerland and Sweden — sank by 5% or more.
I warned subscribers to my Trader’s Advantage service about this a week ago, so it’s not a big surprise and we’ve taken full advantage by owning ETFs that deliver double the inverse of bank-stock indexes. Many European countries’ industrial production, retail and housing are in worse shape than the United States. Due to higher interest rates and slower government response, they are likely to remain worse longer as well, so beware of any investments you have there.
Pzena and Bre: Troubles and Opportunity
As a measure of how bad the past year has been for most investors, it is useful to look at how tough the market has been even for the so-called smart money.
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I was a fan of money manager Richard Pzena for years, as he always seemed to have an intelligent take on neglected value companies in general and financial companies in particular. He took his investment firm public in 2007, only to find his strategy of buying depressed banks crushed throughout 2008.
This evening, Pzena Investment Management (PZN) reported that its assets under management fell to $10.7 billion by December 31, 2008, from $23.6 billion a year ago. That is grim.
Shares of the company, which went public at around $20, are now fetching $4. If the broad market returns to test the November low, this is one financial stock that I will consider for a rebound from lower levels, as I do think Pzena’s style will eventually return to favor.
Meanwhile the real estate investment trusts are also showing new strains. BRE Properties (BRE), one of the largest in the industry, on Monday afternoon announced that it would stop building several developments that it already has under contract, and reduce work force. That will cost it $5.1 million, or 10 cents per share, so you can see it’s a big step.
Last week, the company told 33 employees that their positions were eliminated, and said it would take a $1.5 million charge for that en route to cutting all development personnel by 36%. These cuts are relatively small when you consider that the United States lost more than half a million jobs in December, but they are emblematic of the fearful attitude of executives today.
It is looking more and more like the first quarter of 2009 will show a contraction of GDP, defying the pattern seen in past recessions in which quarters with negative growth are often followed by positive quarters.
To learn how to profit from these developments, check out my Trader’s Advantage service.
This article was written by Jon Markman, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.
