I have written a lot about looking down the road to what might be coming, then following the event as it starts to play out and thinking about portfolio shifts in that context.
One thing we all need to think about is that at some point the financial sector carnage will end. When it does it will make sense to go heavier into financials. This is not intended to be the usual shopping list hooey that you hear about on the network every time the market drops 1% but more about the idea that after what is shaking out as a real sector beatdown but that the group recover at some point in the future.
The more serious you think the subprime/liquidity issue is the longer it is likely that it will take to unwind. I wouldn't think that if they rally in the next week that all the problems will be solved. While I have never thought this was apocalyptic I will concede it could be serious.
Serious as it may be it will end. A month, a year, I don't know but at some point. When it does adding to your financial exposure will be the right trade. Among other things the curve would need to normalize, time would need to pass and ideally a big company would need to fail. As nasty as that last one sounds a large failure is a good way to scare the market into a real bottom.
In that light it makes sense to think about where you might increase exposure. I have one stock in mind. I have learned the story, been watching the stock for a while but have a lot more time to study it before I buy. The name does not matter as it could change in the future, the point here is process.
The sector is in trouble, the trouble will end, and once it does makes sense that the more volatile names within will provide leadership. As a general idea increasing volatility at the start of a new cycle and then letting up on that volatility as the cycle matures has been a reliable pattern in the past.
To be clear, I think a trade is months away. I am simply looking ahead to what comes next.
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20 comments:
Thanks for getting up so early, Roger! I've read elsewhere that the best strategy for reinvesting is to identify those stocks that have the highest relative strength in the segment. How do you view volatility as a tool in relation to RSI?
Time Out Roger, not to worry,
get some sleep. I enjoy your
blog very much. Have a good
day everyone. Bernanke
saved the day....
An interesting article on the SEC can be found at time. Here is its opening:
"Gary J. Aguirre had to apply 24 times to become a staff attorney for the Securities and Exchange Commission, but it only took his first case to make him realize that this was not his public service dream come true. The assignment was heady stuff, a hedge fund insider-trading case that possibly involved one of Wall Street's top executives, John J. Mack, the current CEO of Morgan Stanley. Aguirre threw himself into it with furious energy, and was not intimidated going up against dozens of defense lawyers. That was until his bosses withdrew their support of how he was pursuing the investigation, abruptly reversed — and downgraded — his performance reviews, and then unceremoniously fired him on the last day of his first annual vacation on Sept. 1, 2005."
The rest of the Time article can be found here:
http://www.time.com/time/nation/article/0,8599,1653546,00.html?xid=rss-topstories
John
The Time story reminds of a quotation: "...and search in its broad places, if you can find one man, if there be one that executes justice, that searches for truth: And I will pardon it." and a similar one: "..."For the sake of ten I will not destroy it."
Tom
I think the Fed did the right thing. I think they were worried about the markets starting a disorderly decline. Yesterday's market did not look good.
But Japan truly fell out of bed last night - Nikkei 225 15,273.68 3:00AM ET Down 874.81 (5.42%) The Fed does not want a melt down day to occur in the US and markets are very linked these days.
The Fed did not lower the Fed funds rate. "The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight." (quoted from the Fed web site)
The Fed decreased the penalty for borrowing directly from the Fed by 50 bps. Banks are simply not lending that much to one another these days.
The Fed will do whatever is necessary to keep the financial system orderly, but it does not look like they intend to provide unlimited liquidity ala Greenspan.
So I still believe a slow decline will continue for equities, real estate, and commodities. A slow decline can easily be tolerated by the "real economy" a disorderly decline can not be tolerated by anybody.
Hopefully Fed officials will also halt stupid comments like we will not lower the discount rate unless there is a calamity . Not exactly the verbal reassurance the Fed is suppose to provide.
Roger, as someone who understands a wide range of investing approaches, would you comment on the usefulness in one's portfolio of selling iron condors?
It seems to me that this short term outlook, market neutral approach is safer (if we account for 3 standard deviation moves) and infinitely simpler for the retail investor to implement than going long by trying to calculate stock or sector values, folding in the impact of international economic trends and central bank moves, and then hoping our purchases align with the market's subsequent opinions months later.
b,
I am sorry but other than knowing what iron condors are I am no expert here, far from it.
I have found no shortage of commentary that says you should buy vol here and plenty that says you should sell it and I am not sure what the better trade is.
"infinitely simpler" I'm not sure about as I doubt many folks have even heard of this.
I will say you may be right but I don't know and more importantly it is not something I will be doing for clients. Sorry I can't be of more help.
This blog is hilarious - it is not apocolyptic, but it is serious. its serious but it will end, the sector is in trouble but it will end...you happen to eat chinese food and open one too many fortune cookies
Hey Roger,
how would you (roughly) compare the future opportunity in financials to a sector like the homebuilders? They're somewhat linked, and yet the homebuilders have a 6-month head start.
Roy,
I have never understood the supply and demand for new homes so I have never owned one of those stocks.
This is one of my blindspots and so can't offer anything here.
Ah - me too, I'm afraid. Thanks!
Anon 5:46 quipped, "Bernanke
saved the day...."
But that was just today. This from CBS Financial:
"It definitely changes the mood, but it doesn't fix the problem," said Owen Fitzpatrick, head of U.S. equity group at Deutsche Bank. "Challenges in credit markets and subprime markets remain. We have to see what additional fallout there is from hedge funds or institutions trying to come to the market for liquidity."
The Fed move "cannot fix the subprime mortgage business for financials, it cannot fix the [collateralized debt obligation] business and the unwinding and the de-levering of the leveraged credit and it cannot alleviate some of this asset-backed paper gone bad," said UBS U.S. financials analyst Glenn Schorr.
The Fed may cut rates sooner that their next meeting in mid September. If they do I would say that one would have to be already in the financial stocks that they intend to buy before the rumor of a rate cut. I may have to buy on the dips in the next week or two.
I have been looking at BAC and USB. Great yields too.
Does anyone have a text file with every etf in it so that I can import it in my watch list?
thanks
Andy.
Here are a couple of sites that may be of service:
http://fundsexchangetraded.com/
http://www.etftrends.com/
You may want to go right to Wisdom Tree, ishares, ProShares etc., and copy their lists to a Word Document.
Anon 2:21
Thank You
Andy--
Masterdata.com has a text file of 1178 etfs and cefs that they break into five different categories.
That's one heckuva watch list! Good luck.
Andy...does this help?
go to the following listed site, then click:
"All ETFs Available"
http://personal.fidelity.com/global/search/inquira/resultsindex.shtml?question=etf
Wow! Thanks Everybody!
b,
I would say that iron condors really have no place within long term portfolios. ICs are dangerous positions (even though they're somehow labeled 'conversative'). Sure, 98% of the time you're going to make some nickels and then 2% of the time, you're going to give it all back and maybe then some, maybe not. Unless you have a very firm grasp of how to manage these positions, I suggest you stay far away from them. When you're short all of that gamma and it runs up into you, you're history.
Just my 2 cents.
IMHO, the Financials are in the first couple of innings of this decline. To talk about looking to buy now is much too premature. In fact, I can't believe a man as smart as Buffett is doing serious buying of the banks here. Ben Stein talks about this perhaps being the buying opportunity of a lifetime and that Merrill Lynch is being given away. Please! He really sounds like a greenhorn on this. This is going to get much, much uglier. I would imagine the Financial Select Sector Spider (XLF) could drop by another 50% from here after many of these brokers and banks earnings simply evaporate. Many were similarly making the argument a couple of years ago the homebuilders were cheap due to their low PEs. Buying stocks in cyclical industries when earnings are peaking or have recently peaked is a very bad idea.
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