Bears, Bulls, Chickens and Pigs: wOw’s Wall Street Weekly with Liz Peek (Week of 7/28)

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

Poor John Thain. The CEO of Merrill Lynch is probably thinking wistfully of the days not so long ago when, as head of the New York Stock Exchange, all he had to do was corral a bunch of ornery traders and try to vault the exchange into the 21st century. This week he has been raked over the coals for posting the worst trade of the financial crisis to date, when he sold a $30.6 billion portfolio to private equity behemoth Lone Star Funds for $1.68 billion in actual cash. On the face of it, the CDOs sold for about 22 cents on the dollar; it took Wall Street about a nanosecond to figure out that since Merrill was actually financing the transaction, and that it stood liable for losses on the loans, the actual price was more like 5 cents on the dollar. Ouch! Were the CDOs really that bad? What was Thain thinking?

My take is that Thain is trying desperately (this was indeed that kind of act) to get Merrill out from under its exposure to mortgages and everything related, and focused back on its core businesses. This is a great, international franchise; to have all your workers demoralized by a sinking stock and your clients worried about your survival is a terrible load to carry. So, the stock market gave him a drubbing, in part because he had to sell yet more shares to shore up the stricken balance sheet, but presumably the company has seen the worst. And it was very, very bad.

Investors are hoping that the distressed sale will mark the bottom. And it well might. The initial fear was that everyone else that owned similar securities would have to mark like portfolios down, but that fear may be overblown. In any case, the financials have traded higher over the week, and are up 37% from the low hit on July 15 when Freddie Mac and Fannie Mae collapsed.

That bounce is inspiring some talk about the basic winning trade of the past year – shorting financials and buying energy – being over. Despite a jump in oil prices midweek (and again today – but somehow lacking conviction), they are clearly off substantially from the high point ($147) reached a month ago. The softening economy and obvious shift in consumption patterns is cutting into demand. All of a sudden, the seemingly inevitable march to $150 or even $200 per barrel has faltered. Americans are really changing their behavior. Miles driven in the United States are now down 3.7% so far this year. Higher prices are not just impacting the U.S.; Japanese oil-product sales in June fell 5.5%, with gasoline consumption off 9%.

Otherwise, the economic news continues soft but not terrible. Despite Alan Greenspan’s continuing contentions on CNBC that we’re about to slide into recession (will someone please muzzle that man?), it hasn’t actually happened yet. One reason is that the cheap dollar is boosting exports – trade added a remarkable 2.4% to real GDP growth in the second quarter. Also, businesses are being conservative and drawing down inventories, which means that the 1.8% year-over-year growth in second quarter GDP was actually pretty good.

Overall, this is a tough time, all because of a housing bubble which got way out of hand. Going forward, the United States is going to have to decide how important home ownership is, and to what degree we want to support the opportunity for Americans to buy their own homes. After this recent collapse, the country’s appetite for backstopping organizations like Freddie and Fannie may have waned. My view is that these companies are expected to serve two masters – the shareholders and the public good – and that this bifurcated mission is all but impossible.