"I'm not gonna take this! Sometime yesterday I saw a graphic showing Lehman Brothers down 75% and I thought about the above speech. We also know the drop at Fannie and Freddie is in the 90s.
Everyone knows that the financial sector has problems but the crisis now kind of long in the tooth. That is not a call to go heavy by any means but the crisis is old.
For a little perspective, many folks date the start of this to June 1, 2007 but it actually started much earlier than that. Here is a video I did in December, 2006 (about 5 minutes 38 seconds in) and another one in February 2007 (about 8 minutes 8 seconds in) in which I talk about subprime and actually mention names that were already in trouble and ended up failing one way or another.
Ok, the button to embed a link seems to not be working so the exact dates for the videos are December 23, 2006 and February 10, 2007 for anyone who cares to click through to the archives.
At some point a crisis ends. We all know the financial crisis will end, we don't know when or who the final victims (companies going to zero) will be. It is a good bet that the stocks will turn up, for real, before the uncertainty is over. This is simply how things work as opposed to a commentary on the specifics of this meltdown. Yahoo bottomed at $4.54 (adjusted for splits) on September 24, 2002. Six months later it was at $11.67. One year from that bottom it was at $18.30.
Bounces off the real bottom are big and when the bounce in tech started people were still terrified of the sector. People will be terrified of financials when it turns and for good cause; I would expect some failures to still occur after the bottom.
Just as buying a tech stock in Q3 2002 would have been difficult emotionally to do, so too would buying certain financial stocks be emotionally difficult a few months from now. This makes a good argument for using an ETF, even for folks who usually pick individual stocks. Even if a stock with a 4% weight in an ETF goes poof, the hit absorbed by the fund would not be disastrous to the overall portfolio.
The slightly bigger macro is that after at least 21 months and huge losses I think the most of the risk is now out of prices at the sector level, currently down 45% from the high XLF bottomed out about 55% from the high and could go there again before bottoming. To be clear there will be more carnage at the individual stock level.
You may disagree with the down side estimate or not but the way I view it the down side is what I mentioned above and the upside is the next bull market cycle. For now I am the same underweight I have been for ages, adding more exposure will come, slowly, once the broad market takes back the 200 DMA--whenever that happens. It is a good bet that when that occurs people will still be shunning the sector.
15 comments:
No idea what is going on with the top half of the post being underlined sort of like it was a link.
Apologies.
thanks Roger for the insight. Although it is darn near impossible to pick a bottom my perception of the balance sheets of the financial stocks would tilt me toward the lower catagory. Lots of foreign money is piling into the mkt based on your logic above and they may all do fabulous...but Dick Bove putting a buy on LEH b/c Neuberger could be sold for $9B and the company can be owned for free... is so far beyond logic that it almost DEMANDS a short position. Have a great weekend. Balance sheet repair will be my signal.
One of my best analogies going forward is Japan. Not that I think we will handle it as bad as the Japanese did, but I think we will hear people saying the worst is got to be behind us for quite some time to come.
Roger,
sorry about the link. it appears that one has to register in order to receive their free research. Perhaps you answered my question already since you were not able to log into their site. Attached is a link to GMO. If you have time I would appreciate if you see any value in this firm and their outlook?
http://www.gmo.com/america
that i can answer w/o going to their site. Unless something has changed...
Grantham has been very bearish for a while. Things I have read from him before (Barron's interviews for example) have helped articulate the bear case--so very useful.
The one thing is that markets simply do not have the type of decline he is call for so soon after having just done so. So he is calling for something different. What I have read spells out all the problems but i think another layer of explanation is needed to say why the market will do something different.
Just my take.
Every time I think my portfolio is at the bottom, it just keeps sinking. As you said it Roger...finance is Dead! Long live oil? Or is it renewables? With Pelosi in the renewables game in California (backed by oil of course) who knows? Its a silly world at the moment...oil stocks go up 30% in Canada when Buffet and Gates flew over the oils sands. But then again, maybe they are looking at ways at stopping it, not buying in?!?
www.schneiderpower.com
This is what still scares me though, and why Anon 8:00 AM may be right:
http://tinyurl.com/5o63lj
Well last time around,, i missed the up turn in the microcap funds then the mid then the large after i translated that into what could have been i knew something was flawed..I hope this time around i am aware enough to at least make a decision...lol
I wonder if the July bottom was "it." Pessimism remains strong, and many certainly think we're going back down and even lower. I dunno. I don't think so.
Roger,
I agree this HAS been going on for a long time (or it sure SEEMS like it), but that doesn't mean it can't go on much longer.
What about CRE? That seems to be showing some cracks, as well. Granted, it might not affect joe 6 pack to the degree subprime/Alt-A has/is, but still doesn't bode well for the financial sector, generally speaking.
Something else I've been thinking about for some time are pension funds.....how much "AAA"...(cough, cough) stuff is in THEIR portfolios?
No doubt, there IS some wheat amidst all of the chaff, but I'm thinking money in financials is "dead money", at best, for a fair while.
jan
Hi Roger, Nice new pic. I came across this at Market Ticker, and I wondered if you have any thoughts on it? I guess, aside from it working, the capital gains events would be the issue. The meaty part starts after the second graph:
http://tiny.cc/kvBRc
Hi Roger:
Just a heads up. Your"my profile" link doesn't seem to be working.
I think the financials will stay this way for a while unless one plans to hold it for many years.Some of the individual small and regional banks have fallen so much and some say they can still be shorted.Banks like CBC,CNB are such examples.Very difficult to pick an individual stock.Like you mention, if anyone wants to jump into the financials at this time it issafer to go with an ETF.
Anon 5:55, if your question is about the idea of SPX being back at 768 in two years...generally I am not a huge fan of taking the past and assuming it will repeat automatically.
His get defensive get offensive trigger point is the 50 day 200 day cross which may be more effective. I wrote a while back I might switch on the next go around but will not switch to it mid stream.
it is obviously the same or very similar type of idea as what I write about.
Thanks for your response, Roger. I'm not going to turn this horse in mid-stream either! And I appreicate all the interesting work you are doing on this front (sorry if I missed your post on the same trigger points that MTicker suggested). As for the past repeating itself: Beckett said "ah, the old questions, the old answers; there's nothing like them!"
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