Private Investor: OK, I panicked over Barclays. But then again...
Saturday 17 November 2007
So, two bank panics; one right, one wrong. Last month, I heard the bad news and sold out of Northern Rock for whatever I could get. I lost about a third of my money and felt good about it – in the sense that it turns out I was on the verge of losing much, much more. The Barclays one, last week, was based on no more than a nasty rumour.
My instinct, for what it's worth, by the way, is that anyone still sitting on the Rock, an uncomfortable position by any reckoning, ought to hop off their rock right now, even if it means crystallising a hefty loss and embarrassing yourself (the latter, of course, being an inevitable fact of investing life).
Some weeks ago now, I think, Credit Suisse put out some research that said that Northern Rock shares might be worth as little as 6p each when it's all over. I reckon that's about right.
At the minute the Rock is, if anything, vastly overvalued, and I'd cash in if I were you. The Treasury and the Bank of England will make scrupulously sure that the bank's depositors get every penny of their savings back, but for their shareholders they hold no brief. Sooner or later they will be made to pay the price for commercial failure. Pour encourager les autres.
The second panic of mine occurred last week when I flogged some of my Barclays shares in somewhat chaotic conditions, with all those rumours flying around about billions of losses. Even when that gossip was categorically denied the Barclays share price barely rallied, though these past few days it has been making up some ground, especially when it came out with an up-front statement about its likely sub-prime losses.
Do I now regret selling the shares? Obviously, yes. It would have been far better to have kept my nerve; but then, if I'd done that over the Rock I'd be facing even larger losses.
Maybe, on second thoughts, there's more of a case for offloading Barclays than the sunnier mood this week might suggest. The point is that the credit squeeze is a process, not an event; and it is one that feeds upon itself.
It goes like this. Sub-prime mortgages default in the US and their failure rebounds on to the securities based on their mortgages. That freaks the banks some more and they carry on being cagey about lending to one another – the so-called credit crunch.
That then tends to push up interest rates – as the banks only get tempted to loan when the rewards for doing so start to outweigh the perceived risks of lending. The banks also become more picky about whom they lend to.
Guess what happens next? The sub-prime "community" get it in the neck the next time they have to refix their mortgage and find that no one wants to lend to them. Then they default and the whole process goes through another twist, and another and another until the whole thing gets cleared out. And at each stage in the twist, banks make losses – hence the "process not an event" idea.
Now, my guess is that the clear-out could take some years, just as previous financial fiascos along these lines – the savings and loans scandals of the 1980s, for example – did. So, even though Barclays and Citigroup and the rest of them have probably come clean about the losses they face thus far, and the effect the credit squeeze is having on their business today, who's to say that things might not actually be even worse in a year's time?
So, while the British banks look relatively tempting this week, with a calmer mood prevailing and their yields glistening in the autumnal sunshine, I'd be wary of adding exposure in that sector; more wary, in fact, than I would be about, say, UK property stocks, which do represent a buying opportunity on the basis of their long-run prospects.
I ought to mention here my particular favourites – Savills, which is also a wealth investment house and has much to do with Hong Kong, where things look brighter; and Rightmove, which has an excellent "secular" growth story, based on the migration of classified advertising on to the web. I bought some more Savills a few weeks ago, and I'll continue to buy these two on weakness.
Commercial property will soon also represent a bargain-hunter's paradise – but not yet. I may even dispose of the remainder of my Barclays shares to get into it.
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