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It's been a year since the market stopped being polite and started getting real. In honor of the fall of Lehman, the emergence of TARP, et al., we've been looking back on the good and the bad of the past year. To continue our efforts, we asked a few of our analysts about which stocks look good against the backdrop of the chaos and what regulations we should be instituting posthaste.
A year later, which stock(s) do you have a new appreciation for, post-meltdown?
Morgan Housel: JPMorgan Chase (NYSE: JPM ) has been fun to watch over the past two years. As nearly all its peers either exploded or hung on by their fingernails, JPMorgan not only survived, but prospered. It's a contrarian indicator for investors, but the fact that shares are quickly approaching an all-time high says something about the quality of this company.
More importantly, it's thriving without the public loathing Goldman Sachs (NYSE: GS ) has received. The reason is that JPMorgan makes money the ways banks are supposed to: It lends money to people who can pay them back. It does have significant investment banking and trading operations, but the core of its franchise is build on good, old-fashioned, sound lending.
I wholeheartedly think the megabank model is dangerous and needs reform, but if there's one bank that's proved its worth, it's JPMorgan.
Those wondering how the bank did it should read CEO Jamie Dimon's biography, The House of Dimon. He took several so-so banks and turned them into what's now undoubtedly the strongest big bank in the world. The guy deserves all the credit he gets.
Alyce Lomax: I have a renewed appreciation for cash-rich, debt-free stocks. Of course, I have always been a fan of companies with strong balance sheets. During the debt gluttony phase, I wondered why on earth some companies were borrowing to, say, do stock buybacks or pay dividends. In the sage words of economist Simon Johnson, "Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms."
Prudent investors should focus on strong companies with no debt and copious amounts of cash. Google (Nasdaq: GOOG ) will always have to fear competition from upstarts and old-school rivals such as Microsoft (Nasdaq: MSFT ) , but its $19.34 billion in cash (a whopping $61 per share!) gives it a major survivalist edge compared to an indebted company like Sirius XM Radio. Or how about debt-free retailer Buckle (NYSE: BKE ) , instead of debt-laden Talbots? Investors can set up a diversified portfolio across industries, focusing on strong, cash-rich, debt-free stocks.
Alex Dumortier: I'm going to break the rules by offering up cash as the asset I've found a new appreciation for during this crisis. Superior stock selection is a means to earning excess returns, but the effect of a bubble collapse is overwhelming -- none escape the downdraft, even high-quality names such as JPMorgan Chase or Cisco Systems (Nasdaq: CSCO ) .
Moving into cash when equities are well overpriced enables you to sidestep capital losses and bite into tastier valuations when they (inevitably) show up. Investors shouldn't overlook the importance of asset allocation, particularly during periods of stock market overvaluation.
What financial regulation would you like to see implemented?
Morgan Housel: Two in particular.
My Foolish colleague Ilan Moscovitz and I have discussed that if we can't find the will to regulate something as absurd as naked credit default swaps -- with which derivatives investors can "insure" debt they don't even own -- then the odds of passing any meaningful financial reform are nil. Simple talk of reforming the credit default swap market has been met with fierce opposition. That worries us about the prospect of overhauling more sensitive areas of the industry.
Second, and many have discussed this, one reasonable way to overcome the problem of "too big to fail" is a tiered capital structure, where bigger banks are forced to hold proportionally more capital than smaller banks. Naturally, this would discourage banks from becoming big, since profits would diminish with size.
It isn't a perfect solution (Bear Stearns wasn't that big -- just really interconnected), but it's probably more politically feasible than simply breaking up the biggest banks.
Alyce Lomax: I'm not a huge fan of regulation on principle. I believe it often has unintended circumstances, can work woefully contrary to stated intentions (or inadequately gauge future risk), and often ends up causing distortions and perverse incentives in our economy. However, I think Chuck Schumer's Shareholder Bill of Rights Act sounds pretty reasonable.
Strong corporate governance principles are important. While corporations and their shareholders may be slowly waking up to that opinion, it hasn't been happening quickly enough. Giving shareholders a voice with principles like "say on pay" seems like a step in the right direction. So does a greater emphasis on managers' need to remember shareholders' ownership role -- and shareholders' need to remember their own responsibilities, too.
Alex Dumortier: In "One Year Later, The Big Risk We're Still Facing," I wrote that Tier One financial holding companies (i.e., financial institutions that are "too big to fail") should draw up so-called "living wills" that would specify how they would be broken up and wound down in the event of failure.
Regrettably, the administration's approach to financial regulatory reform -- as outlined by Treasury Secretary Tim Geithner yesterday in a House Financial Services Committee hearing -- appears to be mainly focused on minimizing the risk of failure through stricter capital requirements, rather than openly dealing with the possibility of failure. (Regulators should enact a stricter, counter-cyclical capital regime, but that alone is not sufficient.)
By contrast, U.K. regulators are leading the way on living wills, and there is an early sign that this measure would have the desired effect -- on Wednesday, credit rating agency Moody's (NYSE: MCO ) said that putting in place living wills for large U.K. banks "could potentially result in rating downgrades where ratings currently incorporate a high degree of government support." Any ratings downgrade would likely push the banks' funding cost up, reflecting the market's perception that the government has withdrawn its implicit subsidy.
But enough about us. What do you think? Which companies have weathered the storm so well that you'd gladly hide under their umbrellas? And what's the first new regulation we should implement?