According to Ockham Research, despondency in the markets usually signals the end stages of a bear market, not the early stages. A little reason for hope and optimism, I think this is a fair and accurate account of where we are now. – Ilene 
Financials Rout – Fear is in the Air
Courtesy of Ockham Research
The third quarter of 2008 will go down in history as one when real fear manifested itself in market behavior. Typically, such periods of outright despondency (capitulation) signal the end rather than early stages of a bear market. While there are ample underlying reasons for disquiet in the financial sector, the market is beginning to behave as if every bank in the country is on the brink of collapse. This is far from the case and the carnage of the past month clearly represents an over-reaction to a bad situation.
There is no doubt that the domestic real estate crisis is continuing to batter U.S. financials, the dollar and the global economy. Despite the carnage in markets like California, Florida, Las Vegas, Washington, D.C., Atlanta, etc., real estate values continue to decline largely because of a lingering supply imbalance. The vast over-supply of homes in these markets will take years to work down. However, many regions around the nation do not have this gross over-abundance of property for sale. Furthermore, while defaulted and non-performing loans (mortgages, HELOCs and unsecured) are rising nationwide, the vast majority of debt is being paid in a timely manner.
The Fed’s seizure of IndyMac Bank last Friday, far from calming things, has only deepened the general sense of fear and mistrust which now permeates the entire financial system of the country. No doubt there will be other bank failures. Analyst estimates say that as many as 150 banks nationwide will not survive this crisis. Problems at mortgage behemoths Fannie Mae and Freddie Mac have already required the intervention of Treasury Secretary Paulson to shore up confidence. To date, this intervention has not soothed frayed investor nerves.
Clearly, we are in a difficult situation and, to date, government action has not been sufficient to restore faith and trust in the system. As a result, each trading days sees steeper and steeper losses for virtually every financial institution’s stock. This unrelenting slide in value only makes it harder for financial entities to raise capital in order to put their houses in order. In many ways, the panic begets more grim economic reality and the process becomes a vicious cycle.
What is needed is leadership and courage on the part of investors, depositors and citizens. In his inaugural speech in 1933, Franklin Delano Roosevelt uttered the phrase: “the only thing we have to fear is, fear itself”. These were bold and truthful words spoken in the midst of the worst months of the Great Depression. They remain true today. While clearly suffering through a period of—sadly—self-inflicted economic adjustment, the United States continues to have the most adaptive, resilient and dynamic economy in the history of human endeavor. There are valuable lessons to be learned from this crisis and we have no doubt that they will help future generations build more rational and responsible economic structures. In the interim, it is helpful for investors to step back from the precipice and take a deep breath before joining in the panic that is brewing on Wall Street. We need a George Bailey moment here where we are all reminded of the need to show some spine and work to restore stability and trust in the financial system that serves us all. Without a restoration of that stability and trust, we face a long and difficult road ahead, indeed.