Wall Street, Main Street and a Brave New World

Say it ain't so Joe (Boy to Shoeless Joe Jackson)

By Alberto Marrero Salas
Published on LatinoLA: January 29, 2009

Wall Street, Main Street and a Brave New World

A client recently asked me when I thought the economy would go back to "normal".

He has a home that is in foreclosure. Has not made a payment in seven months and the bank has asked him to remain in the home fearing that if the home was abandoned that vandals would come in and destroy the home.

When I asked him what he meant by normal he replied the way things were before 2007. My answer was, "Never, ever again."

The economy was on steroids. A client of mine who fixed cars on his front lawn sold an old three bedroom home in Van Nuys for over $400,000. Clients who had reported incomes of less than $20,000 per year for a family of four were being sold homes from $400,000 to $550,000.

Clients refinanced and refinanced, sometimes to pay for such frivolous things as a quincea??era or tuition to a four-year college when a junior college filling the general requirements would have been the same.

In one case, with an income of less than $20,000, a couple was sold a home for $450,000. Later on they discovered that he was supposedly making $5,000 per month as an executive at a computer company and his wife was listed as a legal researcher making over $3,000 per month.

The amazing thing is that no one went to jail. Not the realtor, not the broker, not the loan broker, not the bank officer.

Sadly one of the best explanations for the sub prime mess is found in a skit by British comedians John Bird and John Fortune. As funny and silly as this skit is, it is pretty close to the truth.

We will not see baseball players hitting 70 home runs a season anytime soon. Likewise we will not see another real estate market like the 2000 to 2006 market. We will never again see real estate loans made to people who can't afford them. Steroids, whether in baseball or real estate, are a thing of the past.

What to do now.

With Pfiezer announcing 26,000 lays offs, Caterpillar 20,000, Sprint 8,000, Home Depot 7,000, Philips 6,0000, Texas Instrument 7,000 and finally Dutch Financial 7,000 all on the same day (1/26/09) the retail market will have a hard time bouncing back soon. As a matter of fact, the National Assoc. of Retailers is predicting the worse retail sales in the last thirty years.

With layoffs the real estate market should keep on dropping at least for the next 12 months. People who are laid off can't pay their mortgage thereby adding to the already bloated foreclosure market. Stay away at least for the next year from anything having to do with real estate, construction, home improvements, lumber, etc.

Banks at this level, especially Bank of America and Wells Fargo, look attractive. The problem is that with more foreclosures coming down the road, how well can these banks do. Bank of America (BAC) is trading around $5-$6 a bargain but again, due to layoffs and foreclosures, risky.

Add to that the problems being faced by the B of A in their efforts to digest recently acquired Merrill Lynch. John Thain the CEO of Merrill was fired this week. As I wrote in LatinoLA several months ago I just can't see those two blending together. The cultures are totally alien to each other.

I worked for Merrill in the late 70's and early 80's. I know the mentality, the vision, the outlook at Merrill. Merrill executives made three to four times what their counterparts made at the B of A. Working either at the B of A or with the B of A was not imaginable to people at Merrill. In 1983, my uncle was working in San Antonio for the B of A. I introduced him to people at Merrill. He jumped ship the next year. His income went up by 300%.

I believe that in the end, Merrill will have to be either split from the B of A , be sold, or the Bank of America will wind up with only a name and a shell, as Merrill account executives will be cutting deals left and right and defect to other investment banks such as Goldman, Crowell or Morgan Stanley.

Another risky but potentially profitable situation is Ford. Out of the big three it seems to have gotten its act together and new impressive offerings are in the works.

Finally, I believe that the area to be in when the economy recovers is in the energy field and metals. When the economy recovers, China, India and Brazil will again be leading the charge in transforming their economies and standard of living. You will see a huge rise in demand for autos, housing and infrastructure.

You will see in all of those three countries a rising demand for oil, gas, coal and metals. In the metals area I like US Steel (X) which is trading a a little bit over two times annual earnings. I also like Impala Platinum of South Africa. (Impuy) one of the world's largest platinum producers, and the King Rio Tinto (RTP) the worlds largest mining company.

In the oil patch you can buy the drillers such as Transoceanic (RIG) and Rowan Company (RDC). Oil producers such as Apache (APA) and Hess Corp (HES). California-based Occidental Petroleum (OXY). Refiners such as Valero (VLO), Mobil Exxon (MOB) and locally Chevron (CVX). Natural Gas Chesapeake (CHK) and William Brothers (WMB) and in the coal sector BTU (BTU) who is the largest producer of clean coal.

Oh well, enough of gazing into the crystal ball. If God is willing (Ojala) we'll come back a year from now and see how well or how badly we did.

Thanks once again to Abelardo and all of the folks at Latino LA for maintaining a truly unique gem of a site.

About Alberto Marrero Salas:
Worked on Wall Street, Merrill Lynch and Pru Bache. Now partner Nacara 2000 practicing immigration law
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