The subprime lenders will crash the stock market
By Chip Parker, Jacksonville Bankruptcy Attorney on Jul 25, 2007 in Florida, Personal Finance
I lost my shirt in in March of 2000 when all of those really cool dot-coms stocks I owned suddenly collapsed. I realized then that I was picking companies for all of the wrong reasons. I would buy a stock because I thought its price would rise, not because I thought it was worth more than its current price. As a matter of fact, I had NO IDEA what the value of my stocks were when I bought them. Eventually, the stock market punished me for my stupidity.
Welcome to 2007, and a new era of stupidity.
The DOW JONES INDUSTRIAL AVERAGE recently eclipsed 14,000. However, analyst Bill Fleckenstein believes investors are ignoring the inevitable impact caused by the collapse of the subprime lending industry. As we have been saying at BLN for months, highly-leveraged subprime lenders were careless in the way they lent their investors’ money with little or no regard for risk. As a result, a record number of defaults have occurred, and foreclosures are at an all-time high. As Fleckenstein puts it, the market “is going to exact a penalty for the guessers who’ve guessed right for the wrong reason.”
The negative effect of the subprime debacle is simultaneously destroying the real estate market and the economic market. However, stock prices continue to rise which, given the enormity of the problem, makes no sense. Fleckenstein laments, “[T]hose people (like me) who thought that analysis would matter to the stock market (the opinion part) have been incorrect, as thus far it hasn’t mattered. . . Nonetheless, I am more convinced than ever that the outcome I envision is unavoidable, even as the timing remains unpredictable.”
The Average Joe relies on stock market analysts to tell him where to put his retirement savings, and these analysts had better stop relying on “correct guessing” and start studying the evidence.
See also Wendell Sherk’s BLN article on the Subprime Bond Market.
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