Hussman Funds Weekly Market Comment
John Hussman discusses Lehman and how “Only the Stock and Bond Holders Should Expect Losses (Not Customers)”. Read the full weekly market comment here.
It’s important to recognize that the timing of the stress at Lehman is not a coincidence independent of the Fannie and Freddie bailout. Rather, the U.S. government essentially sent an information signal that highly leveraged financial institutions were insolvent. Next to Bear Stearns, Lehman had the highest gross leverage multiple on the street (the continuing problem is that several others are quite close). Last week, Lehman reported $600 billion in assets, on less than $20 billion of common shareholder equity. Evidently, the markets (and potential acquirers) don’t believe that the $20 billion is as tangible as Lehman reports. Put another way, a markdown in the value of Lehman’s assets by just over 3% would wipe out that reported shareholder equity.
Hussman says “…if we keep on believing that the default of Bear Stearns bonds (“bankruptcy”) would have caused a global financial crash, then I expect that we are in for a global financial crash anyway. Not because there is any true risk to customers and counterparties, but because investors are misinformed about how the financial markets work, and they will panic as foreclosures and writedowns inevitably soar in the months ahead. A financial panic is fully avoidable if Wall Street and the media stop propagating the utterly false belief that a Bear Stearns bankruptcy would have led to a “chain reaction” of financial losses.
Asian and Australian markets are down heavily this Monday morning. The S&P/ASX 20 is down 2.4% with major finanicals down 4-7%. As Hussman suggested it appears that investors are starting to panic. Now is an important time to pay close attention and get your wallet or purse ready.
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