KINGSTON, Jamaica – The collapse of the giant financial institutions now taking place in the United States offers big, new opportunities to disciplined investors, says Sharon Whitelocke of JN Fund Managers Limited (JNFM.)
Over the weekend there was panic on Wall Street as Lehman Brothers, with US$550 billion in debts, reported that it would file for bankruptcy, and Merrill Lynch agreed to be acquired by Bank of America. The U.S. insurance giant, American International Group Inc. also stated on Sunday that it was discussing “options” with outside parties, after posting US$18.5 billion in losses over the last nine months.
Sharon Whitelocke, Research and Development Manager, JN Fund Managers believes the current financial climate in the US holds potential for investors
“Whatever happens in a market, there are opportunities,” Mrs. Whitelocke said. The Research and Development Manager added that these will be apparent to investors who can see beyond the panic.
Those opportunities might not have been apparent as stock markets fell over the weekend in response to the crisis. The panic followed the U.S. Government take over of mortgage giants Fannie Mae and Freddie Mac the previous weekend.
Mrs. Whitelocke is of the opinion that Investors who assess this situation and conclude that the U.S. and other major global economies are about to collapse would be well advised to take their cash and put it in the safest place they can find. However, those who see the current situation as another in a series of market cycles should carefully examine their options.
Investors take calculated risks with the expectation of returns, so those who understand the risks are able to make better decisions, said Mr. Jerrold Johnson, JNFM Financial Advisor. To ensure investors understand the variables involved, he said, “Keep it simple.”
The facts are that the government bailout of Fannie and Freddie is designed to support the U.S. housing market, which has seen prices fall about 15 percent on average in the past year.
It is this housing market downturn which has triggered the defaults and foreclosures on U.S. home mortgages, causing losses of more than US$500 billion by banks worldwide.
The bankruptcy of Lehman Brothers is the result of this crisis. The simple fact is that Lehman Brothers is seen as being dispensable to the U.S. economy, while Freddie and Fannie are not, and so are being bailed out.
Freddie and Fannie provide the backbone for the U.S. mortgage market by collateralizing loans so they can be sold to other financial institutions.
The two institutions own or guarantee about US$5 trillion in home loans. This amounts to around half that nation’s total.
Investors should note that with Lehman and Merrill removed, three of the top five U.S. investment banks have been eliminated within six months. Bear Stearns was acquired in a distress sale to JP Morgan in March.
Investors in Merrill paid dearly for the weekend intervention, getting US$29 per share from Bank of America, compared with more than US$98 at the peak in early 2007. For other investors, the outlook might be different.
Bank of America is the biggest U.S. bank in terms of deposits, while Merrill Lynch is the world’s largest brokerage. Combining the two would create a global financial giant to rival Citigroup Inc., the biggest U.S. bank in terms of assets.
“When I look at Bank of America, I think it is an excellent buy,” Mrs. Whitelocke said. “It is too big to fail.”
The bank had a market capitalization of US$154 billion last Friday while Merrill Lynch had a market capitalization of US$26 billion.
Bank of America’s retail banking operation remains highly profitable. Analysts say it is a good fit with Merrill Lynch, which concentrates on wealth management, financial advice and brokerage services.
There are other “huge opportunities” in the U.S. and Canadian markets, Mrs. Whitelocke said. In two to three years, investors who take advantage of them should be seeing substantial gains.
“If you can buy when everyone is afraid, they will be seeing then what you are seeing now,” is Mrs. Whitelocke view. “The market has its glitches but it always comes back.”
