Betting on a bottom in the financial sector is gambling, Jim.

It may be a good bet or a bad bet, but it’s a bet all-the-same. Let’s not pretend otherwise.

We are in completely unchartered waters here.  We have no idea what the financial services industry will look like in six months. We cannot even be sure what it will look like in six days.

We’ve got the House Republicans playing political football with the bailout; Henry Paulson trying to appoint himself czar; Wall Street banks begging with one hand and lobbying with the other; and Presidential candidates who refuse to comment on the most pressing financial crisis in eighty years. 

There is a black hole of leadership in this country, and that’s frightening.

The only reason there isn’t panic on Main Street is that people don’t understand the credit markets. The credit markets have stopped functioning. LIBOR spreads, money markets, CDS contracts, muni’s … the market is in chaos. This will hit Main Street in a very real way if it isn’t corrected soon: companies will be unable to meet payroll, factories will be shuttered, etc.

A few points to remember:

• We don’t know for sure that the bailout will go through (although it looks like it will).
• We don’t know for sure that the bailout will work.
• We don’t know for sure what regulations will be enacted next year by Congress to constrain the financial sector in the future.

That last point is a big one. Regulators are going to rewrite the financial laws next year. The days of 33-1 leverage are over, and that means that profit growth and P/E ratios will shrink in the Financial sector.

I’m as tempted as you are to call a bottom in Financials and pick up some bargains. I’ve almost bought XLF myself a few times over the past week or two. I may do it yet. Over the next few years, there’s probably a good chance you make money on that trade.

But with all the uncertainty and poltical brinksmanship going on, no one … no one … has any real insight into how this will turn out.

In the best-case scenario, banks will not return to their 2006/2007 profit levels for many years to come.

In the worst case …  well, our fearless President said it best:

“If money doesn’t get loosened up, this sucker could go down.”

—Sign of the Apocalypse—

According to Ali Velshi, senior business correspondent for CNN, reporters at the station are not allowed to use words like “meltdown” or “free fall” to describe the markets without prior approval.

A spokesman for the Wall Street Journal says the paper is “staying away from” words like “crash,” “panic,” “apocalypse” and “pandemonium.”

I understand that this is the most reflexive market we’ve ever had; a big confidence game.  But when the media starts banning words, that doesn’t exactly inspire confidence, does it?

Last 5 posts by Matt Hougan

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