Let me preface the following by saying that I DON'T recommend the following strategy to the average long-term investor for various reasons that I'll get into later. But, just for a bit, I'm putting on my trader hat, and then I'll talk about planning.
Short the Financials: If you're really on board with me that the financials are headed down in the short term, and are able to be aggressive right now, there's a leveraged short ETF play that I like called the ProShares UltraShort Financials ETF (Symbol: SKF). I plan to talk more about ETFs in future posts. Basically, This is a short equities fund that trades like a stock which seeks to profit from downward movement of various issues within the financial sector. UNDERSTAND comma however: It's 3x leveraged short and thus very aggressive--you could lose most of your investment if finacials take off. Right now, I don't own it, and of course I'm obligated to disclose if and when I do, but I'm watching it.
And now that I'm officially fully off topic; speaking of aggressive ETFs, as I said yesterday, I'm also bearish commodities, specifically corn, gold, and oil. As such, I do actually own the ProShares UltraShort Oil & Gas ETF (Symbol: DUG), which is a mega short oil & gas play that moves 3x Oil, and is as such not for the faint of heart...
Back to the point: Being primarily concerned with financial planning, I can't overstate the distinction between strategic financial planning on the one hand and strategic or tactical trading on the other. They are related but distinct concepts, and many people don't quite get the difference, and their portfolios suffer because of it.
To illustrate the distinction: Tactical, Short-Term trading, such as the ETF trade discussion above, is almost NEVER part of an effective broad financial plan. In fact, very commonly the urge to trade is the number one portfolio-killer! For lots of reasons, but primarily due to costs and poor risk management, it would be maniacally negligent to recommend that my clients make trades like this with any sizeable portion of their portfolio.
But, if you've got some play money lying around, and the wife won't miss it, then who am I to tell you not to gamble a bit on some sector moves?
Tuesday, March 25, 2008
Financials Headed Back Down? 3/24/08
"Much like a kidney stone, This too shall pass..."
That the broader markets held up today is actually pretty encouraging given the shaken consumer number and the grim news from the housing front. But the report today further confirms the extent to which the turmoil in the housing market has infected the broader market.
I wrote about the rally in the financials yesterday. For the reasons I pointed out, I think it's likely the financials will go lower near term, and it looks like any recovery will be long (6-12 months) and bumpy. So, if you're long the financials, if you're in positions in like C, MER, JPM, GS, MS, and the like, you could consider writing some covered calls against these positions as a way to protect against the short term downside while retaining the long-term exposure.
Some of the financials, however, it's time to bag entirely IMHO. I'm especially bearish on C and WB. Wachovia's 9.5% dividend seems unsustainable, and a reduction in the dividend would be disastrous for the stock price. But, more importantly, the analysts say that it's likely that WB's true exposure to credit losses has not been fully elucidated due in part to its foreclosure accounting methods, even after they swore up and down that all the skeletons were out. Another write-down would be bad for investors. (I try to elegantly understate...)
That the broader markets held up today is actually pretty encouraging given the shaken consumer number and the grim news from the housing front. But the report today further confirms the extent to which the turmoil in the housing market has infected the broader market.
I wrote about the rally in the financials yesterday. For the reasons I pointed out, I think it's likely the financials will go lower near term, and it looks like any recovery will be long (6-12 months) and bumpy. So, if you're long the financials, if you're in positions in like C, MER, JPM, GS, MS, and the like, you could consider writing some covered calls against these positions as a way to protect against the short term downside while retaining the long-term exposure.
Some of the financials, however, it's time to bag entirely IMHO. I'm especially bearish on C and WB. Wachovia's 9.5% dividend seems unsustainable, and a reduction in the dividend would be disastrous for the stock price. But, more importantly, the analysts say that it's likely that WB's true exposure to credit losses has not been fully elucidated due in part to its foreclosure accounting methods, even after they swore up and down that all the skeletons were out. Another write-down would be bad for investors. (I try to elegantly understate...)
Monday, March 24, 2008
Tack's Market Commentary 3/24/08
Market Commentary This Week:
Fully 40% of our nation's corporate profits come from the financial services industry, and the sector has been decimated following the credit crisis and fears that complex securitization has led to hidden risk on the big banks' balance sheets. But, after a recent rebound, many analysts are saying the worst could be over, and the big question in the markets this week seems to be: Have the Financials hit bottom?
Since hitting new lows on March 17 following the news about Bear Stearns, the index had seen a 34% decline since its June 2007 highs, and was down some 19% YTD on Monday. But, following the Fed's actions in the subsequent days and renewed optimism that the worst news has come and gone, the financial sector is in the midst of a huge upward surge. The NYK Index is up 12.3% from its intraday Monday lows.
Much of the carnage at some of the banks has been due to massive write-offs from bad investments in the market for CMOs (collateralized mortgage obligations). But, you can't simply blame the housing market. The creation and collateralization of complex securities has been both a boon and a problem for the industry. On the one hand, these new products have been a massive profit center to the banks, on another, the source of much of their ills, and, many argue, the source of the current credit crisis.
Many analysts believe we have seen the worst of the write-offs from the investment banks. The markets have yet to fully appreciate the positive impact of the moves to lower short-term interest rates, open liquidity loans up to investment banks and allow Fannie (FNM) and Freddie (FRE) to increase investments in U.S. mortgages by $200B.
Perhaps the most positive signal this week has come from the credit market, as this week, we've seen a pronounced steepening of the yield curve. The yield curve is the difference in interest rate on short term issues versus long term issues. In times of growth and relative stability, the yield curve is "sloping," with shorter maturities commanding lower yields and investors in long term maturites demanding a premium. In periods of economic uncertainty, the yield curve may "flatten," with investors demanding roughly equal premiums for both short-term and long-term debt. At Thursday's close, the spread between the 2 and 10 year note was 1.78 percentage points, double the 0.88-percentage-point long-term average. Last year, the difference was negative.
Weekly Recap as of close on 3/20:
Since hitting new lows on March 17 following the news about Bear Stearns, the index had seen a 34% decline since its June 2007 highs, and was down some 19% YTD on Monday. But, following the Fed's actions in the subsequent days and renewed optimism that the worst news has come and gone, the financial sector is in the midst of a huge upward surge. The NYK Index is up 12.3% from its intraday Monday lows.
Many analysts believe we have seen the worst of the write-offs from the investment banks. The markets have yet to fully appreciate the positive impact of the moves to lower short-term interest rates, open liquidity loans up to investment banks and allow Fannie (FNM) and Freddie (FRE) to increase investments in U.S. mortgages by $200B.
Our guys say that the strongest players in the industry could see share price appreciation of 10-20% over the next year. Still, long term, uncertainty and questions about the sustainability of even current valuations still remain. And, many of the headlines in the near term will remain negative, e.g., CIT Group (CIT), Credit Suisse (CS), Goldman (GS) and Lehman (LEH) all with bad news this week. Some of the weaker banks could go bust or seek bailouts from larger firms, and analysts say that that much of the near-term performance depends on whether most of the risk is already priced into the share prices.
On a broader note, I talked last week about how a fall in commodity prices could be a precursor to a recovery in both the economy and equity prices. If this theory proves correct, then the news last week was encouraging. Gold fell sharply and the dollar gained ground.Perhaps the most positive signal this week has come from the credit market, as this week, we've seen a pronounced steepening of the yield curve. The yield curve is the difference in interest rate on short term issues versus long term issues. In times of growth and relative stability, the yield curve is "sloping," with shorter maturities commanding lower yields and investors in long term maturites demanding a premium. In periods of economic uncertainty, the yield curve may "flatten," with investors demanding roughly equal premiums for both short-term and long-term debt. At Thursday's close, the spread between the 2 and 10 year note was 1.78 percentage points, double the 0.88-percentage-point long-term average. Last year, the difference was negative.
According to a Barron's article this weekend, Moody's economist John Lonski says the steep yield curve indicates that we are further along in a recession and that the situation will be better 6-12 months from now. And, a steep yield curve should help large commercial banks like JPMorgan Chase (JPM) and U.S. Bancorp (USB) over the brokerage houses, because a steep yield curve also allows financial institutions to borrow short-term money at low rates and lend it out for longer terms at higher rates.
The most recent developments all point to a possible bottom in the financials. But, the fundamentals are still pretty scary, and, as we saw with Bear Sterns, the current environment can change quickly, so tread carefully, especially if you are just entering now. It may very well be a dead cat bounce.Weekly Recap as of close on 3/20:
Monday, March 17, 2008
Tack's Market Commentary 3/17/08
Here's my take on the markets this week.
There's a lot to be worried about, certainly. But, even with Bear, there has been some possible light at the end of the tunnel this week, to-wit:
1. Standard & Poor came out last week and said that It looks like (gulp) that the worst of the sub-prime crisis is behind us, $285 Billion Dollars later even before Bear Sterns.
2. Inflation seems to be relatively contained given the steep rise in commodity prices. Certainly, it's more expensive at the pump, and corn flakes cost more than cold beer, but core inflation remains largely benign.
3. The Fed finally seems to have gotten the message, especially after Bear Sterns, that a lack of liquidity is only part of the story--it's underlying asset quality and excessive leverage that took down BSC and threatens the financial system. What that means is that simply cutting the Fed Funds Rate won't do the trick, and the new unconventional approaches announced last week are welcome and needed. Rarely, if ever, has the fed made so much money available in so many different ways in such little time.
I'm not saying it's all roses and lollipops. There has been and will continue to be serious pain in the housing market. I feel terrible for people that have lost their homes and their life savings. But we came too far too fast, and we forgot to care about credit quality. Here's a telling fact. Of first time homebuyers, between mid-2005 and mid-2006, almost half put down nothing at all when they bought their homes, and the median down payment was just 2%. What the hell did we expect!?
There is still room to fall in the equity markets, certainly. The dollar's journey to the center of the earth hasn't helped, and isn't done. But, smarter people than I say that signs of a bottom are beginning to appear. We've tested & retested our January lows, which says to our pointy-headed technicians we're near a bottom. More fundamentally, a lot of these smart people say that a fall in the commodities markets will be our signal that we may have hit bottom. I think this is coming soon. Don't kid yourself--$110 oil will not be here for long. The strongest performing asset class year to date has been frickin' silver, with gold not far behind. Far from a flight to quality, I think it's speculation, and I really think it's close to time to get back in the equities ring.
Bottom line in my mind: the bears should get some perspective. Cycles happen. There is real pain out there, but the sky is not falling. It's interesting to me: everyone whines about underperforming managers, when the reality of the situation is that reason most funds do fine, but most people underperform the market. This is due largely to their curious tendency to exit the market when their portfolio is down, and to hang on to their best performing assets like grim death. Don't be like most people. Concept: Buy low. Sell high. Or, better yet, get yourself an appropriate & diversified asset allocation model and stick to it, and don't have to buy or sell much of anything except your sailboats.
We've been here before, and we'll be here again. 1998 was not that long ago--remember Long Term Capital Management? Remember the Russian debt default? Remember '87? This time around has been just as painful. But we'll be back, and soon enough we'll be whining about inflation & ready to inflate the next big bubble.
Can you say alternative energy?
There's a lot to be worried about, certainly. But, even with Bear, there has been some possible light at the end of the tunnel this week, to-wit:
1. Standard & Poor came out last week and said that It looks like (gulp) that the worst of the sub-prime crisis is behind us, $285 Billion Dollars later even before Bear Sterns.
2. Inflation seems to be relatively contained given the steep rise in commodity prices. Certainly, it's more expensive at the pump, and corn flakes cost more than cold beer, but core inflation remains largely benign.
3. The Fed finally seems to have gotten the message, especially after Bear Sterns, that a lack of liquidity is only part of the story--it's underlying asset quality and excessive leverage that took down BSC and threatens the financial system. What that means is that simply cutting the Fed Funds Rate won't do the trick, and the new unconventional approaches announced last week are welcome and needed. Rarely, if ever, has the fed made so much money available in so many different ways in such little time.
I'm not saying it's all roses and lollipops. There has been and will continue to be serious pain in the housing market. I feel terrible for people that have lost their homes and their life savings. But we came too far too fast, and we forgot to care about credit quality. Here's a telling fact. Of first time homebuyers, between mid-2005 and mid-2006, almost half put down nothing at all when they bought their homes, and the median down payment was just 2%. What the hell did we expect!?
There is still room to fall in the equity markets, certainly. The dollar's journey to the center of the earth hasn't helped, and isn't done. But, smarter people than I say that signs of a bottom are beginning to appear. We've tested & retested our January lows, which says to our pointy-headed technicians we're near a bottom. More fundamentally, a lot of these smart people say that a fall in the commodities markets will be our signal that we may have hit bottom. I think this is coming soon. Don't kid yourself--$110 oil will not be here for long. The strongest performing asset class year to date has been frickin' silver, with gold not far behind. Far from a flight to quality, I think it's speculation, and I really think it's close to time to get back in the equities ring.
Bottom line in my mind: the bears should get some perspective. Cycles happen. There is real pain out there, but the sky is not falling. It's interesting to me: everyone whines about underperforming managers, when the reality of the situation is that reason most funds do fine, but most people underperform the market. This is due largely to their curious tendency to exit the market when their portfolio is down, and to hang on to their best performing assets like grim death. Don't be like most people. Concept: Buy low. Sell high. Or, better yet, get yourself an appropriate & diversified asset allocation model and stick to it, and don't have to buy or sell much of anything except your sailboats.
We've been here before, and we'll be here again. 1998 was not that long ago--remember Long Term Capital Management? Remember the Russian debt default? Remember '87? This time around has been just as painful. But we'll be back, and soon enough we'll be whining about inflation & ready to inflate the next big bubble.
Can you say alternative energy?
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