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What Volatile Wall Street Means for Investors and San Diego posted on Monday, 22 September 2008

To say Wall Street has been on a rollercoaster ride would be like saying Republican vice presidential nominee Sarah Palin draws some ire from the left. Yes, understatement is the key word here.

By Dave Thomas

After taking a beating on Monday, Sep 15 and seeing another day of down numbers later in the week, Wall Street saw a major rally on Friday, Sep 19 (more than 366 points before closing) to end the week as investors, hearing of the government's tentative plan for a massive bank bailout plan, came flooding back into the market.

President Bush and Treasury Secretary Henry Paulson both agreed that a bold approach is necessary to remove troubled assets from the books of financial firms. While Paulson offered limited details, he indicated that he would work on it through the weekend with congressional leaders.

Many financial experts believe a plan to help the banking industry could help alleviate the uncertainty that has been sending the markets into such a frenzy this week, and also free up some lending, which has virtually ground to a halt.

Among other moves the government is doing to restore some calm is having the central bank purchase short-term debt obligations issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

Bob Agahi, a partner at Triyar Companies and partner/co-founder of lendability.com, said the federal government is doing the right thing by intervening.

"Without them as a backstop, the imminent doom if Fannie Mae, Freddie Mac and AIG collapsed would have been absolutely catastrophic and would've resulted in massive worldwide implications," Agahi commented. "We are also seeing the end of the traditional stand alone broker-dealer on Wall Street. Companies such as Bear Sterns, Lehman Brothers and Merrill Lynch, which have been around since as early as the 1800's have been all but wiped out."

Brent Kirk, COO of lendability.com, said the recent Fed takeover of Fannie and Freddie, was long speculated, and for the most part necessary.

"Most people don’t realize that the Fed or U.S. Government has already been running another loan agency (FHA) that was doing far superior in regards to performance of loans," Kirk said. "With Fannie and Freddie now in the hands of the Fed, the companies no longer have to worry about shareholders and maximizing profits, which do not go hand-in-hand with helping us get out of the housing bubble. Fannie and Freddie own 2/3rds of all the mortgages in the U.S.; they are not going away anytime soon. "We think this is a big plus that the government stepped in and did what is right for the homeowners."

So what does all this mean for you, the general consumer and investor?

Agahi said if you look back to every major stock market crash (measured by a percentage decline in major index averages); there have always been great buying opportunities.

"Calling bottoms is one of the hardest things to do technically and psychologically," Agahi continued. "It really goes against hard wired judgment and it's not for everybody but it really is true when people say 'when there is blood on the streets...buy'. People will look back and wish they got in on some of these companies at current levels. There is a tremendous amount of panic selling and short selling going on. Fear is everywhere. One of the hardest things to do is buying when everyone else is panic selling. There are some obvious sectors that have potential of complete collapse so being careful and picking blue chip companies with little debt and a good balance sheet is critical as well."

Asked if either presidential candidate (Barack Obama, John McCain) is saying things to make the public feel more reassured Agahi noted, "Unfortunately neither of them is really saying anything relevant. McCain blames greed and corruption of the investment banks. Obama blames the current administration for political gain. Mostly it is just typical rhetorical campaign positioning. Unfortunately it is too political and the current economic crisis is the number one issue on American families' minds these days. They are more concerned with the election than the details of the problems themselves. Both candidates will have one severe mess on their hands."

Paulo LaGreca, CEO of lendability.com, would advise both McCain and Obama to try to relate with today's homeowner.

"At our company we have a saying 'These are good people with bad credit,'" LaGreca said. "Today’s homeowner facing foreclosure is far different from the consumer of the past. These people have a history of fantastic credit. These are educated and financially savvy homeowners. They simply got caught in a house that is worth less than they owe, substantially less. This needs to be the main subject of the candidates. How do they plan on fixing it? The mortgage industry as a whole has taken most of the blame in recent news. Yet it was celebrated as the savior after September 11th, pulling us out of a major economic down turn. The next president must have a game plan going in to office. Mortgage brokers should be a big part of the recovery; they are the ones who can shop for the best available market rate though multiple banks."

As for the local housing market, LaGreca said the San Diego market was one of the first areas in Southern California to show signs of weakness.

"We all should have heeded the warning signs form San Diego," LaGreca commented. "The good news that derives from the early signs of weakness is the losses were mitigated. Had the market ran for another year, more areas would be suffering today with more borrowers walking away from their homes. Some strong factors for the recovery of the housing market in San Diego is the diverse economy. This will help protect San Diego from the same fate of Orange County."

LaGreca pointed out that Orange County had such a large concentration of its economy rooted in the mortgage industry, that it fell prey to a double edged sword of depreciation in the housing market along with job losses as the mortgage industry fell. "There is still a ways to go on the road to recovery in the housing market," LaGreca added. "I do feel we are nearing the bottom in San Diego. We are finally seeing inventories drop, by a small amount, but still they dropped. Supply and demand that we are all aware of will be the key to regaining some equity for many of the homeowners in the greater San Diego area."

While homeowners fret over their housing issues, those with investments have no doubt kept another weary eye on Wall Street in recent days. Many have likely questioned if more regulation is the key?

Agahi, when asked if more regulation is needed for a number of these major companies, said yes, although regulation has proven to be not such a good practice in the past.

"We need some sort of commissioned regulation to prevent immediate catastrophe," Agahi remarked. "We always seem to go through these cycles of regulation, then deregulation. Regulation played a role in the current crisis but it wasn't the key factor. The key factor was greed. Regulation will help calm things down and provide some stability and then inevitably people will call for deregulation."

Asked if the current troubles were like a perfect storm, Kirk said the Fed has drawn a line in the sand that they are not here to bail out everyone (Lehman), and if they must take you over (AIG) because of the counterparty risk then expect it to come at a premium.

"AIG was loaned $85 billion, but the government took over 80 percent of the company and the terms of the loan are at Libor 8.5 percent," Kirk noted. "The Fed is already rumored to be shopping this loan to the private sector because the premium is so high The 'perfect storm' is here, and things might still get worse - but like all major events it will get better."

So should folks be worried with the constant challenging economic news being given to them?

LaGreca said business owners and the every day employee have a right to be concerned with the economy's stability right now.

"I would definitely be concerned," La Greca said. "The current market fluctuations are being fueled by major speculation. The data reflects a recession and consumers and owners alike need to find ways to save for brighter days. We recently launched a new company in spite of the conditions. We want all homeowners to know that rates are near seven year lows and if we can save you money on a monthly basis, this is the time to do it. Americans are changing their spending behavior during these tough times. You can look at Starbucks; $5 coffee fell out of favor in a hurry."

It wasn't too many weeks ago that Starbucks announced it was closing a number of its stores.

In hindsight, that may have just been the tip of the iceberg in the financial meltdown we are currently seeing.

Posted by bizSanDiego: San Diego Business News | 1 Comments