Why I Used Charts

Years ago, I was more of a technical trader. "Don't tell me what you think, tell me what you see!" The following make me wonder why I ever started to listen....

Political “Experts”

“The Federal government will not bail out lenders — because that would only make a recurrence of the problem more likely. And it is not the government’s job to bail out speculators, or those who made the decision to buy a home they knew they could never afford.” (George W. Bush, Sept 2007)

“These institutions [Fannie and Freddie] are fundamentally sound and strong. There is no reason for the kind of [stock market] reaction we’re getting.” (Christopher Dodd, Chair, Senate Banking Committee, Financial Post, July 12, 2008)

“Misery sells newspapers. Thank God the economy is not as bad as you read in the newspaper every day.” (Phil Gramm 7/10/08)

“I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing.” (Barney Frank regarding Fannie & Freddie, 2005)

“I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists.” (Barney Frank regarding Fannie & Freddie, 2007)

Financial “Experts”

“Improvements in lending practices driven by information technology have enabled lenders to reach out to households with previously unrecognized borrowing capacities.” (Alan Greenspan, October 2004)

“There is a chance that housing prices could fall, but its effect on the economy will be limited.” (Alan Greenspan, 2005)

“The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions …. Derivatives have permitted the unbundling of financial risks.” (Alan Greenspan, May 2005)

“I suspect that we are coming to the end of the housing downturn, as applications for new mortgages, the most important series, have flattened out…I think that the worst of this may well be over.” (Alan Greenspan, October 1, 2006)

“The market impact of the U.S. subprime mortgage fallout is largely contained and that the global economy is as strong as it has been in decades.” (Henry Paulson, January 2007)

“All the signs I look at show the housing market is at or near the bottom. The U.S. economy is very healthy and robust.” (Henry Paulson, 4/20/07)

“I’m not interested in bailing out investors, lenders and speculators.” (Henry Paulson, 3/2/08)

“At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.” (Ben Bernanke during Congressional Testimony 3/2007)

“We will follow developments in the subprime market closely. However, fundamental factors—including solid growth in incomes and relatively low mortgage rates—should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system.” (Ben Bernanke, 6/5/07)

“It is not the responsibility of the Federal Reserve—nor would it be appropriate—to protect lenders and investors from the consequences of their financial decisions.” (Ben Bernanke, 10/15/07)

“Changes in financial markets, including those that are the subject of your conference, have improved the efficiency of financial intermediation and improved our confidence in the ability of markets to absorb stress. In financial systems around the world, the capital positions of banks have improved and capital markets are becoming deeper and playing a larger role in financial intermediation. Financial innovation has improved the capacity to measure and manage risk. Risk is spread more broadly across countries and institutions.” (Timothy Geithner, May 15, 2007)

Investment “Experts”

“The worst is over.” (Warren Buffett, on Bloomberg TV, May 3, 2008)

“Sometimes, we drink the kool-aid.”(Moody’s internal email)

“It could be structured by cows and we would rate it.” (S&P internal email)

“Let’s hope we are all wealthy and retired by the time this house of cards falters.” (S&P internal memo)

“Chairman Bernanke has succeeded; the economy has been positioned on a sustainable track for manageable expansion: A Goldilocks scenario that is neither too hot nor too cold.”(MikeThomson, Financial Post, April 25, 2007)

“And I believe there will be NO FALLOUT whatsoever beyond the funds, despite the innate desire by so many people to rumor and panic the marketplace.” (Jim Cramer regarding Bear Stearns, 6/22/07)

“I am indeed sticking my neck out right here, right now… declaring emphatically that I believe the market will not revisit the panicked lows it hit on July 15, and I think anyone out there who’s waiting for that low to be breached is in for a big disappointment and [they’re] missing a great deal of upside. My bottom call isn’t gutsy. I think it’s just a smart call that all the evidence points toward. Bye, bye bear market. Say hello to the bull and don’t let the door hit you on the way out.” (Jim Cramer, August 4, 2008 – market is down 28% since then)

“The stock market is cheap on a price-earnings basis, profits are fabulous, both here and abroad, stocks are a lovely place to be. I have no idea what the S&P will be ten days from now, but I am confident it will be a lot higher ten years from now, and for most Americans, that’s what we need to think about. The subprime and private equity and hedge fund dogs may bark, but the stock market caravan moves on.” (Ben Stein, August 13, 2007 – market down 40% since then)

“The losses in the stock market since the highs of October 2007 are about 14 percent. This predicts — very roughly — a fall in corporate profits of roughly 14 percent. Yet there has never been a decline of quite that size for even one year in the postwar United States, and never more than two years of declining profits before they regained their previous peak.” (Ben Stein, January 27, 2008)

Corporate “Experts”

“We finished the year positioned better than ever to capitalize on the array of opportunities still emerging around the world as a result of what we believe are fundamental and long-term changes in how the global economy and capital markets are developing.” (Stanley O’Neal, former CEO of Merrill Lynch, January 2007)

“We deliberately raised more capital than we lost last year … we believe that will allow us to not have to go back to the equity market in the foreseeable future.” (John Thain, another former CEO of Merrill Lynch, April 8, 2008)

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” (Charles Prince, former CEO of Citigroup, July 2007)

But as I do reflect on it, and I do a lot, that nobody saw this coming. S&P and Moody’s didn’t see it coming, but they simply just downgrade bonds, they don’t take hits. Bear Stearns certainly didn’t see it coming. Merrill Lynch didn’t see it coming. Nobody saw this coming. (Angelo Mozilo, former CEO of Countrywide Financial, July 2007 after he sold $138 million of stock)

I’m confident our company is in the right businesses for the long term and that our strategy of being in high growth businesses and markets, our laser focus on customer service, our expense discipline, and our commitment to strong credit risk management, will create value for our shareholders in the future. (KenThompson, former CEO of Wachovia, October 2007

John Barnyak
President
Stonehouse Asset Management