Worst Investments of the Financial Crisis

Sep 23, 2014   //   by Profitly   //   Market, Profitly  //  Comments Off on Worst Investments of the Financial Crisis
Via www.scottonmoney.com

Via www.scottonmoney.com

We are constantly telling our students (and prospective students) that learning from your mistakes is one of the most important factors in becoming a better trader. You’re not going to get every trade right, and you will hardly ever (if ever) time a trade perfectly. None of our gurus are perfect yet they still make hundreds of thousands and sometimes millions of dollars in a given year. How? Because they limit their losses and learn from their mistakes.

So we thought it would be interesting to look back at some of the worst trades during the financial crisis. Below is a list that first appeared on CNBC.

The financial markets are littered with forecasters, most with either an outwardly bullish (optimistic) or bearish (pessimistic) bias. Most of them missed the financial crisis when it hit by being too bullish, and some have been too bearish since, worrying that another systemic collapse is around the corner when in fact equity markets, at least, continue to zoom to new highs.

Indeed, there have been some great calls and some awful ones over the past 25 years. Here are three trades that went bust:

Via www.investmentnews.com

Via www.investmentnews.com

1. “Whitney whiffs on munis.” Truth be told, Whitney was probably always overrated. Even during her heyday in the latter part of the aughts decade, Whitney was ranked 1,205th out of 1,919 equity analysts in 2007 and 919th out of 1,917 in the first half of 2008, according to Fortune. So all the fanfare over her market-calling ability almost seemed destined to end badly. And so it was that in late December 2010, she was featured on CBS’s “60 Minutes” and made the call heard round the fixed-income world: A prediction that 50 to 100 municipal bond defaults would cause “hundreds of billions” in losses that immediately moved markets but ultimately would be proven badly unfounded.

In fairness to Whitney, the muni space has not been without its high-profile defaults, but the situation has not approached her dire forecast. In her mostly overlooked 2013 book, “Fate of the States: The New Geography of American Prosperity,” Whitney only briefly mentioned the muni call, maintaining that the media overhyped her remarks. Despite the high profile she cultivated, Whitney also protested in the book that she didn’t like that her name had “become synonymous with doom and gloom.” Nowadays, her name is mostly synonymous with a very bad bonds call, and her public profile has dimmed significantly.

Via blogs.cornell.edu

Via blogs.cornell.edu

2. “Cohen: Crisis? What Crisis?” Face it, almost everybody on Wall Street missed the financial crisis. But you would be hard-pressed to find a major analyst at a major Wall Street shop caught more unaware than Abby Joseph Cohen, the Goldman Sachs chief strategist who still had her rally cap on well into 2008 as the market imploded. Cohen set an uberbullish 1,675 price target for the S&P 500 for that fateful year, not foreseeing that the world was crumbling before her eyes. The stock market index would close at 903.25, a 37 percent drop and 46 percent below Cohen’s target. That same year, Goldman replaced Cohen with David Kostin and moved her over to a position as “senior investment strategist.” Yet on Wall Street there’s always room for a second act: Cohen maintains a prominent role at Goldman and even was selected to go first at a recent high-profile question-and-answer session with Federal Reserve Chair Janet Yellen.

Via www.garvensmortgagegroup.com

Via www.garvensmortgagegroup.com

3. “Helicopter Ben’s “contained” crisis.” Most accounts of financial-crisis history no doubt will paint then-Federal Reserve Chairman Ben Bernanke as one of the central figures on the Committee to Save the World, as it was nicknamed. But it was also Bernanke’s seeming obliviousness to the dangers of subprime mortgages that helped stoke the debacle in the first place. In a speech given March 28, 2007, before the Joint Economic Committee, the central bank chief showed just how deep the denial ran over the coming crisis: “Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear,” he said. “At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.”

The statement would soon prove to be tragically shortsighted, though the Fed ultimately would join with the Treasury Department to devise trillions of dollars’ worth of alphabet-soup programs that bailed out the financial, insurance and auto industries, paving the way for a recovery—albeit grudgingly slow—that continues today.

Honorable mentions: “Dow 100,000” by 2020, according to the 1999 book by Charles W. Kadlec (yes, we know it’s not 2020 yet, but seriously?); Marc Faber, Schiff and all of the perma-bears (a group from which Roubini has only recently extricated himself) who have been fighting the market all the way up from its March 2009 lows; Whitney Tilson’s 2004 prediction that Google would be “highly disappointing” to investors.