We Can Make Fun But…

A few months ago I was critical of the many CNBC guests who seemed to be ignoring what clearly looked like the start of a bear market. There was a lot of “looking across the valley” sorts of talk which I think did a disservice to people.

It’s wasn’t so much looking across the valley so much as leading off with that like it was the most important thing. I would have liked to have heard a little more realistic thought but that is probably just me being naive.

So as far as looking across the valley goes there is this recap of the Lone Star purchase of a chunk of Merrill’s mortgage backed portfolio for $0.22 on the dollar. Lone Star didn’t buy them because they think the paper is expensive and ripe for an implosion. It could happen of course but the deal, based on price and all the concessions Merrill is giving them is attractive relative to some period of time, in their opinion.

This bring us to the financial stocks. For anyone in the 1+1=11 brigade I am underweight as I have been for years and am not buying more exposure (it may grow larger here if the sector rallies). Throughout the entire crisis or whatever we should call it I have made clear that I think underweight as opposed to zero weight accomplishes the goal of missing a chunk of down a lot without the risk of missing some massive counter-intuitive rally, should one ever come along.

But for anyone who is zero weight and afraid of missing some sort of massive counter-intuitive rally, most of the names (the vast majority really) will survive this and live to make bad loans in the future.

At this point the sector is down a lot, there will be survivors and when the bottom does come (this is not a prediction of when) there could be a furious rally. Anyone wanting to go from zero to underweight might want to add some exposure, again anyone with zero exposure going up to underweight.

There are plenty of banks with no headlines related to the crisis (although they are probably down a lot) that would be good places to start looking. There many foreign banks that are much simpler businesses than the companies we read about every day that could be a good place to look too.

A third possibility would be some of the single country or regional funds that have a disproportionate amount allocated to financials. Anyone going this route would want to look under the hood and if two or three banks weigh prominently learn a little about those banks to try to minimize getting blindsided.

The big macro here probably that after the crisis the world (the sector) will go on. My expectation is for more downside in the sector from here but not a lot more (sector, not certain specific names) and the risk associated with zero weight is much greater now than it was six months ago.

18 Comments

  1. The WSJ article doesn’t appear to mention that Merrill’s only recourse for their 75% financing is to take the CDO’s back. This the purchase of a call option by Lone Star, and a bull@#$t move by Merrill to get the stuff off their balance sheet (for the time being). Not the sign of a bottom IMHO.

    Reply
  2. The problemwith many guests is they have a special interest because they manage funds that must be invested and as you know many funds are either not or poorly managed.

    By the way, have you read Bonds, The Unbeaten Path to Secure Investment Growth by Hildy & Stan Richelson? Any comments on their approach for the near or in retirement?

    Ron

    Reply
  3. i’m sorry i have not read that book.

    can you sum it up?

    Reply
  4. “most of the names (the vast majority really) will survive this and live to make bad loans in the future”

    … so, so true.

    Reply
  5. ‘The big macro here probably that after the crisis the world (the sector) will go on.’
    Agree…but how long can “we the people” hold on? Just got an oil
    bill for $460 and an electric bill for $250 (one month).
    This is the middle of summer…
    we hang most laundry out to dry
    and don’t have air conditioning.
    We are very energy aware and
    there are only 3 of us under
    one roof. One just got a job
    at a liquor store…profits up
    23% so far for the year.
    retired

    Reply
  6. Sorry to here about those bills; that’s incredible.

    Reply
  7. Geez…a $250 electric bill w/o AC? Where do you live? Are you sure your neighbors don’t have extension cords running to your house?

    Reply
  8. blogger has prevented me from publishing until the site gets reviewed. A “bot” flagged this site as a spam blog. I did what needed to be done to start the process of undoing this but until then….

    Reply
  9. By the way, have you read Bonds, The Unbeaten Path to Secure Investment Growth by Hildy & Stan Richelson? Any comments on their approach for the near or in retirement?
    Still reading it but makes a case for an all bond portfolio vs equity’s, etc and that costs associated with buying stocks, funds etc. as well as costs, taxes, etc associated are a large drag on performance and 10% average long term returns can be accomplished with much less risk with an all bond portfolio, using mostly individual bonds of most types.

    Reply
  10. I wonder what’s up w/ Blogger? Same thing happened to me a couple weeks ago, but they sent me an email first – so I was able to head it off at the pass.

    Reply
  11. I totally agree with your comment on foreign banks.There are many foreign banks that are not all involved in the credit and they have sound business models.

    United Overseas Bank of Singapore(UOVEY) is one example.

    Reply
  12. Hi, Roger,

    Sure miss reading your words every day!

    I have a brother who has all his money in RMBS and ELN. I’m thinking of buying a -little bit- of ELN on Monday or Tuesday. The brother will be happy that I’m finally buying some, he’s been pressuring me for a year now.

    Do you think the beginning of the week will be too soon?

    Reply
  13. there are many compliance reasons why I can’t give advice along the lines being asked for.

    What I can say is that if you are looking to take a flier with a stock soliciting opinions from folks, like me, that no doubt know less than you do about it can only make the decision more difficult to make.

    sorry

    Reply
  14. sorry I can’t get the video to play.

    I would say the same thing though that I have been saying since before this all got started. some of the details chnage from bear to bear but the things that come from those details are always very very similar. for now I still say why should it be different now?

    Normal bear give or take, lots of fear, disbelief ahead of time and disbelief when the real bottom comes.

    Reply
  15. Apologies for my comment about ELN. The instant I clicked, I had the thought, “This is inappropriate.” But the click is the click, hey? I kind of hoped you’d wax philsophical about general stock market vagaries.

    Please excuse my most awkward question/post. Cheers, And very glad you’re back!

    Melissa.E.K.

    Reply

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We Can Make Fun But…

A few months ago I was critical of the many CNBC guests who seemed to be ignoring what clearly looked like the start of a bear market. There was a lot of “looking across the valley” sorts of talk which I think did a disservice to people.

It’s wasn’t so much looking across the valley so much as leading off with that like it was the most important thing. I would have liked to have heard a little more realistic thought but that is probably just me being naive.

So as far as looking across the valley goes there is this recap of the Lone Star purchase of a chunk of Merrill’s mortgage backed portfolio for $0.22 on the dollar. Lone Star didn’t buy them because they think the paper is expensive and ripe for an implosion. It could happen of course but the deal, based on price and all the concessions Merrill is giving them is attractive relative to some period of time, in their opinion.

This bring us to the financial stocks. For anyone in the 1+1=11 brigade I am underweight as I have been for years and am not buying more exposure (it may grow larger here if the sector rallies). Throughout the entire crisis or whatever we should call it I have made clear that I think underweight as opposed to zero weight accomplishes the goal of missing a chunk of down a lot without the risk of missing some massive counter-intuitive rally, should one ever come along.

But for anyone who is zero weight and afraid of missing some sort of massive counter-intuitive rally, most of the names (the vast majority really) will survive this and live to make bad loans in the future.

At this point the sector is down a lot, there will be survivors and when the bottom does come (this is not a prediction of when) there could be a furious rally. Anyone wanting to go from zero to underweight might want to add some exposure, again anyone with zero exposure going up to underweight.

There are plenty of banks with no headlines related to the crisis (although they are probably down a lot) that would be good places to start looking. There many foreign banks that are much simpler businesses than the companies we read about every day that could be a good place to look too.

A third possibility would be some of the single country or regional funds that have a disproportionate amount allocated to financials. Anyone going this route would want to look under the hood and if two or three banks weigh prominently learn a little about those banks to try to minimize getting blindsided.

The big macro here probably that after the crisis the world (the sector) will go on. My expectation is for more downside in the sector from here but not a lot more (sector, not certain specific names) and the risk associated with zero weight is much greater now than it was six months ago.

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