Northern Rock Bank Run, Broker Recommendations and House Price Crash

By: Nadeem_Walayat

Whilst the run on the Northern Rock Bank continues during weekend openings, the same brokers and the mainstream financial press that were recommending buy and hold on the stock throughout the year are still dishing out advice on what savers and investors should now do, again with a bullish tinge. With every other paragraph containing words such as bid target, despite the fact that there's an ongoing run on the bank and liquidity has dried up in the market place so exactly where the financing will come from is anyone's guess. Additionally it will take many years for the public to gain confidence in the brand name 'Northern Rock', after watching endless news reports of savers lining up at high street branches throughout the UK to withdraw their funds in sheer panic.

The Value of Broker Recommendations

Of 17 brokers / financial press recommendations tracked from the beginning of the year, as far as I am concerned only one got it consistently right on Northern Rock - Citigroup.

Chart Courtesy of BigCharts.com

It is clear that the inbuilt bias towards holding and buying stocks remains, this despite the Enron experience. It is probably a mix of self interest and herd mentality where brokers tend to follow the other brokers most of whom have a bullish bias, unless there is blatantly obvious reasons to be bearish on a stock. Which by and large means that broker recommendations are to all intents and purposes worthless.

Now as I sit here contemplating dipping my investment toes back into the financial sector, which bank should be at the top of my consideration list ? Well, one clearly stands out of the crowd in terms of competence in corporate analysis ;)

UK Banks At Risk

Other big UK banks at risk both with large UK subprime mortgage books and reliant upon money market financing to a significant degree are Bradford and Bingley, Alliance & Leicester and to a much lesser extent HBOS. So be prepared for many more financial sector shocks as the crash in the financial sector continues.

The Continuing Run on Northern Rock Bank

Northern Rock closed on Friday down over £2.00 at £4.38, Northern Rock 30% Share Price Crash . An estimated £2 billion will have been withdrawn by savers by Sunday, which represents 10% of the banks deposits. The Bank of England estimated facility is for £4 billions ( Northern Rock Bank Seeks Emergency Cash From The Bank of England). However the Bank of England has now put their reputation on the line and therefore it is highly conceivable that they would now be prepared to finance the whole £20 billions should it be necessary to do so, as the consequences of a withdrawal of the facility now would result in a catastrophic loss of confidence in the UK financial system. What this means is that the central bank may be more reluctant to bail out other 'smaller' banks due to the example of what is happening to Northern Rock.

The obvious comparison with the United States would be with Countrywide Financial, which has announced over 13,000 job losses and has been forced to borrow billions of dollars as the US Housing bust continues. Therefore the outlook for the 6000 Northern Rock employees and remaining stock holders does not look to bright for the foreseeable future, barring a takeover bid.

Those panicking the most, the savers are protected up to £35k of deposits at 90.5%. But I just cannot see Northern Rock being allowed to go bust!, takeover yes, but bust no. Because if this bank goes bust, then its game over for Britain's financial system as other UK banks follow Northern Rock into financial oblivion. We would be talking about a financial catastrophe that would result in something similar to the 1930's depression, far worse than the recession that is required to get rid of the froth that's built up over the last 10 years in the derivatives and housing market.

Technical Picture for the Stock Price

This is going to have to be an educated guess based on my experience of how a large fundamentally sound stock should behave following a panic driven stock price crash, of which Northern Rock fits the profile. Technically there should be a bounce of 50% of Fridays decline, my guess is that the stock will rally next week towards £5.40, and thereafter move in a trading range of between £5.40 and £4.40, so very volatile.

Once things settle down from the current panic stage, the expectation is for Friday's price gap to be filled, which implies a target of £6.45. After that the fundementals will exert themselves, and given that the UK housing market is now in a bear market, the longer term fundementals do not look too good!

Impact on the UK Housing Market

Late on Friday further news emerged signaling a sharp fall in UK house prices. According to Rightmove's latest survey, UK house prices slumped by 2.8% in September. Rightmove attributed the drop to the implementation of the Home Information Packs which was warned of on 1st May 07 UK Housing Market Heading for a Property Crash .

The outlook for the UK housing market is to now be in a 2 year bear market targeting a drop of 15%,UK Housing Market Crash of 2007 - 2008 and Steps to Protect Your Wealth (22nd August 07).

By Nadeem Walayat
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