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Financial Distress

user profile picture Chris Martenson Nov 13, 2008
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The broad stock market is now testing the recent lows.  But the real story is in the financial stocks themselves.

This is as close to an all out breakdown as I can imagine.

For starters, I have been keeping a close eye on Citigroup because they hold massive amounts of both derivatives and so called "Level III assets", those unknowable piles of junk assets that management gets to park off to the side at whatever value they want to put on them because there is no open market for them.  

This chart says "bankruptcy coming soon."

Citigroup is now down more than 50% in just a few weeks and over 10% just today alone.  If Citi goes under, it will make the Lehman bankruptcy look tame by comparison.

Oddly, the breakdown in the stock markets this week is reminiscent of the declines that preceded the G7 meeting a month back and which led to the US bailout plan being hurried through Congress.

And here we are going into the G20 meeting with a similar scare-raising decline.

What is a "financial company"?  Hard to say anymore since many companies are involved in financial activities as a supplement to their main activities.  For instance, for many years the finance arm of GM created the bulk of GM’s profitability leading some wags to state, "GM is a finance company with a car division bolted on."

Look at the behavior of these other financial companies today:

I’ve put GE in there because they’ve got enormous financial exposure through their GE Capital division and are eyeball deep in various derivative holdings and issuances.

Together, these financial stocks are indicating that there is still some unpleasant news out there waiting for us.  

Until we get official word, I am keeping a very close eye on the financial and insurance companies, because that’s where I think the next shoe to drop will be.