Where We Are and Where We're Going
A "time out" for reflection before the home stretch.
Nobody said it was easy.
No one ever said it would be this hard.
As last year drew to a close, we revisited our 2007 themes and weighed them in kind. Many of them came to fruition, others were early, but most hit the mark.
When we entered 2008, we offered a fresh set of forward-looking expectations. With a conscious nod that we must stay humble or the market will do it for us, it’s time for some reflection as we cast an eye towards the home stretch.
Theme 1: Hedge Funds Buying Brokers
January thought: The critical issue facing financial institutions after years of engineering and risk recreation is the solvency of their balance sheets, particularly if they're forced to move Level III assets back onto their books.
Look for large, well-capitalized hedge funds to take selective stakes in troubled brokers as the financial continuum comes full circle.
Update: We offered in July that during the recession of 1989-1991, 25% of the financial universe disappeared but in the midst of what was an entirely more problematic credit crisis, only 8% evaporated. That chasm has since narrowed.
We’ve indeed seen investments by private equity firms and hedge funds. The TPG investment in Washington Mutual (WM) and Lehman Brother's sale of Neuberger, Berman to Bain Capital and Hellman & Friedman come to mind.
There’s a new world order on Wall Street, one where the industry itself has been called into question. I foresee further mergers as a function of need as companies strive to survive. There will be fewer, more regulated, less-leveraged institutions once this consolidation process completes.
Bank if America (BAC), JPMorgan (JPM) and Wells Fargo (WFC) -- and now Citigroup (C), or so it seems -- have been circled as survivors, but that doesn’t mean they’ll prove to be profitable investments.
Theme 2: Migration Toward a Middle-Class Mindset
January thought: As Kevin Depew wrote on Minyanville, "If the '90s were about wealth, accumulation and consumption, 2008 will continue the mean reversion toward something altogether more austere, if not more sensible. Debt reduction and the rejection of (and guilt projection toward) materialism will continue what began in 2006 and 2007 as meditations on not just doing more with less, but doing less... period."
Update: The last few years highlighted the chasm between the “have’s” and “have not’s”. While the former middle class has struggled for some time, the comeuppance of the upper echelon has arrived. The flashy rides and outrageous spending habits that were badges of arrival during the era of consumption now serve as hollow reminders of misplaced priorities.
The short-sale ban shifted the construct of capitalism when it suspended the free market system. One of the unintended consequences of that action will be the destruction of wealth across the financial continuum. Few people on Main Street will shed a tear for them, but the implications for spending habits and the perception of wealth will be long lasting.
It’s been our view that the economy has long been in a recession, one that’s been masked by the decline in the dollar and skewed by the spending habits of a slimming margin of society. The voluntary thrift that will now manifest as a result of this culture shock will permeate an already fragile socioeconomic structure.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at email@example.com.
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