Posts tagged ‘Bear Stearns’

Measuring Chaos

Ruler

An interesting study was done by Morgan Stanley Europe, in which they looked at the last 19 bear markets and subsequent rallies. I’m not sure how much weight you can put on these results since every bear market is unique in its own right, nonetheless it provides a good frame of reference for debates.

What the Morgan Stanley team found was that the median bear market resulted in a -57% decline over 30 months and the ensuing rally equaled about +71% over 17 months. The problem is that our bear market in the U.S. was much shorter than the median timeframe despite its steepness – the fall effectively began in October 2007 and bottomed in March 2009 (about 17 months in duration). Since the decline was faster in duration, does that mean the advance will be as well? Not sure. Our current rally has lasted about six months, which implies there is about another year for the rally to continue based on this data.  

Prieur du Plessis wrote about the Morgan Stanley work for Seeking Alpha

Prieur du Plessis wrote about the Morgan Stanley work for Seeking Alpha

As I alluded to earlier, it’s hard to compare an average to a period in which we had financial institutions dropping like flies (i.e., Bear Stearns, Lehman Brothers, WaMu, Fannie Mae, AIG, etc.) and people were hiding in caves – you knew it was really serious when it even caused voracious consumers to save money…imagine that. At the end of the day, stock and index prices eventually follow earnings. Because of the severity of this downfall, earnings came down faster than prices because fundamentals deteriorated faster than cost cutting could take place. When the economy begins to recover, the opposite will occur – businesses will not be able to hire and spend as fast as earnings are growing. It will be a nice problem to have, but nonetheless characteristic of a typical economic recovery.

Cycle II

In the U.S., the consumer will have a lot to say about the shape of the recovery since they account for about 2/3 of our country’s economic activity. The other “X” factor will be to what extent government legislation will have an impact on the economy. There will be opportunities available domestically and internally, but in order to survive the chaos, one needs to have a diversified and balanced global approach.

Read the Full Seeking Alpha Article Here

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

September 3, 2009 at 4:00 am Leave a comment

Surviving in a Post-Merger Financial World

The financial institution dominoes have fallen.

The financial institution dominoes have fallen.

Over the last two years we have experienced the worst financial crisis since the Great Depression. As a result, financial institutions have come under assault from all angles, including its customers, suppliers, and regulators. And as we have watched the walls cave in on the banking and brokerage industries, we have seen a tremendous amount of consolidation. Like it or not, we need to adapt to the new environment.

The accelerated change began in early 2008 with the collapse of Bear Stearns and negotiated merger with JP Morgan Chase. Since then we saw the largest investment banking failure (Lehman Brothers), and the largest banking failure in history (Washington Mutual). Other mergers included the marriage of Merrill Lynch and Bank of America, the combination of Wachovia into Wells Fargo, and most recently the blending of Smith Barney into Morgan Stanley. These changes don’t even take into account the disruption caused by the government control of Fannie Mae, Freddie Mac, and AIG.

So what does all this change mean for consumers and investors?

1)     Rise in Customer Complaints: Change is not always a good thing. Customer complaints rose 54% in 2008, and climbed 86% in the first three months of 2009 according to FINRA (Financial Industry Regulatory Authority), a nongovernmental regulator of securities companies. The main complaint is “breach of fiduciary duty,” which requires the advisor to act in the best interest of the client. Making the complaint stick can be difficult if the broker only must fulfill a “suitability” standard. To combat the suitability limitation, investors would be well served by investigating an independent Registered Investment Adviser (RIA) who has a fiduciary duty towards clients.

2)     Less Competition = Higher Prices: The surviving financial institutions are now in a stronger position with the power to raise prices. Pricing can surface in various forms, including higher brokerage commissions, administrative fees, management fees, ATM fees, late fees, 12b-1 fees and more. 

3)     Customer Service Weakens: The profit pool has shrunk as lending has slowed and the real estate gravy train has come to a screeching halt. By cutting expenses in non-revenue generating areas, such as customer service, the financial institutions are having a difficult time servicing all their client questions and concerns. There is still fierce competition for lucrative accounts, but if you are lower on the totem pole, don’t expect extravagant service. 

4)     Increased Regulation: Consumer pain experienced in the financial crisis will likely lead to heightened regulation. For example, the Obama administration is proposing a consumer protection agency, but it may be years before tangible benefits will be felt by consumers. Financial institutions are doing their best to remove themselves from direct oversight by paying back government loans. In the area of financial planning, proposals have been brought to Congress to raise standards and requirements, given the limited licensing requirements. Time will tell, but changes are coming.

Investing in a Post-Merger Financial World: Take control of your financial future by getting answers from your advisor and financial institution. Get a complete list of fees. Find out if they are an independent RIA with a “fiduciary duty” to act in the client’s best interest. Research the background of the advisor through FINRA’s BrokerCheck site (www.finra.org) and the SEC’s Investment Adviser Public Disclosure Web site (www.sec.gov). Get referrals and shop around for the service you deserve. Survival in a post-merger world is difficult, but with the right plan you can be successful.

For disclosure purposes, Sidoxia Capital Management, LLC is an independent Registered Investment Advisor in California.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

August 7, 2009 at 4:00 am Leave a comment


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