Bears, Bulls, Chickens and Pigs: wOw’s Wall Street Weekly with Liz Peek (Week of 9/8)

Editor’s Note: Liz Peek is a financial columnist. 

The Pope is apparently praying for the survival of Alitalia, Italy’s national airline that is on the brink of bankruptcy. I wonder if he’s available to put in a good word for Lehman, Merrill and some of the other financials? Without a doubt, they could use a little divine intervention.

At the moment, the heavens are not being very cooperative, as yet another hurricane threatens not only the Gulf Coast, but also Wall Street. As Houston and Galveston hunker down to prepare for Ike, traders are trying to fend off strong winds swirling around Lehman Brothers. Even for old-timers in the business, the possible collapse of the nation’s fourth-largest investment bank is unthinkable.

When will it end? Judging from the sell-off yesterday and today in Merrill Lynch, AIG and Washington Mutual shares, we are still in the eye of the storm. Ironically, there is some sense that the housing crisis has peaked. Though foreclosures continue to rise, they do so at a lessening pace. Still, the numbers are staggering. One in every 416 households in the U.S. has received some foreclosure notice. The problem is highly concentrated in four states: California (which accounts for fully one third of the foreclosures), Arizona, Florida and Nevada. In other words, the foreclosure rate does not indicate widespread financial woes as much as crazily speculative development.

The problem with Lehman — and more broadly with the financial services industry — is a lack of transparency. Wall Street is not quite clear on the toxicity of Lehman’s assets. You have to assume that they hold more troubled loans and securities than we know, or else someone would surely have stepped in to buy the storied firm. The authorities surely know what’s on Lehman’s books; the Fed has been in the firm monitoring its trading on a daily basis. They have the right to do so since Lehman has been accessing the Treasury borrowing facility that was made available to the investment banks right after Bear Stearns went under. That credit line was supposed to prevent any other firms from collapse; its failure to do so is but one unimaginable aspect of the current drama.

It is assumed that this weekend a deal will be struck, either with Bank of America or Barclays. Treasury Secretary Henry Paulson has said that the government will not backstop a sale as it did in the case of Bear Stearns. After taking charge of Freddie Mac and Fannie Mae last weekend, Paulson no doubt fears adding even more to the Treasury’s exposure to the housing debacle. Already some in Congress are noisily criticizing Paulson’s proactive approach. Since buyers are under no compulsion to buy Lehman, a lack of government support makes the situation fragile — and tense. I have never seen Wall Street more anxious.

Meanwhile, today’s report that retail sales fell 0.3% added to concerns that the rest of the economy is struggling. If you strip out gasoline where prices dropped (a GOOD thing!), all other retail outlays were flat. This is not too surprising, given the impact on the preceding months of the income tax rebate.

Retail sales figures confirm the majority view that the economy is slowing. Rising exports have boosted growth so far this year, thanks to a weak dollar. However, as economic gains in Europe and the third world subside, and the dollar rises in value, exports may falter. Sluggish consumer spending will continue to stem from anxiety about home prices, and from a weak jobs market. On the other side of the ledger is a fall-off in oil prices, which will temper any decline in spending.

All the conflicting pluses and minuses are hard to keep in mind. But here’s the one fact that is unassailable: Consumer spending in recent years was buoyed up by a massive onetime-only drawdown of home equity. We all know people who borrowed against the increased value of their homes, assuming that the rise in prices would go on and on. While the increase in their home price probably vanished, the debt remains. That, in my view, is the single most enduring factor that will moderate growth in the U.S. for some time. That’s not to say that we can’t see the market move higher, or that real growth won’t resume. It is simply a factor which boosted several years’ performance, and which will not help us going forward.