Financial Crisis: Getting Old

by: Roger Nusbaum August 22, 2008 | about stocks: FNM / FRE / LEH / XLF    

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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. I did  a video in December 2006  and another one in February 2007  in which I talked about subprime and actually mention names that were already in trouble and ended up failing one way or another.

At some point a crisis ends. We all know the financial crisis will end. What we  don't know is 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 (YHOO) 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 downside estimate or not, but the way I view it, the downside 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.

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This article has 17 comments:

  •  
    Aug 22 04:32 PM
    True words spoken by a wise man.

    CrossProfit
    Reply | Link to Comment
  •  
    Aug 22 04:40 PM
    Until it bottoms, SKF is the ultra short real estate ETF and is a good buy here. It's in the 120's, topped at $215 and you can expect it to hit or exceed that on the next dropped shoe. But sell it soon after that shoe has dropped, because it will fall back again as the market thinks for the 4th time, that the worst is over.
    Reply | Link to Comment
  •  
    Aug 22 04:50 PM
    Paying my rent is getting old as well, but that doesn't mean it will end anytime soon.
    Reply | Link to Comment
  •  
    Aug 22 05:05 PM
    To compare the financial problems of all these banks with Yahoo is just none sense as far as I remember Yahoo didn't have any "wink" "wink" off the books liabilities. Save this article an re-post in a couple of years and it may be true
    Reply | Link to Comment
  •  
    Aug 22 05:30 PM
    I am getting old to, but I dont think I will give up soon...
    in with SKF when I Roger writes these sort of things,
    out when all are scared, and preparing for jump in the
    SRS wave, the next panic ride...in the near future, dollar selling should build towards an extreme, with heavy foreign investment in the dollar fleeing the U.S. currency for safety elsewhere. With the domestic financial markets and U.S. Treasuries so heavily dependent on foreign capital for liquidity, the Federal Reserve — now touted as the formal financial market stabilizer — will be forced increasingly to monetize federal debt. That process will build over time, given the federal government's effective bankruptcy:

    Some say the world will end in fire,
    Some say in ice.
    From what I've tasted of desire
    I hold with those who favor fire.
    But if it had to perish twice,
    I think I know enough of hate
    To say that for destruction ice
    Is also great
    And would suffice.


    Reply | Link to Comment
  •  
    Aug 22 06:55 PM
    Agree that stock prices of the survivor banks will bottom 3 to 6 months before the peak in bank failures. But the July 11 lows will be retested and possibly breached, before that bottom occurs.

    I would not be a buyer until the retest happens. And even if that retest occurs within the next 60 days, I would wait to see 3rd quarter earnings before buying.

    Financial sector XLFs won't provide much of a gain if several heavily weighted banks fail or are taken over at fire sale prices.
    Reply | Link to Comment
  •  
    Aug 22 07:24 PM
    I'd be a buyer after the havoc that is going to be created with Fannie and Freddie if they go under... well, for the shareholders that is!

    To Oups did it again... The author is comparing ONE stock of the Tech debacle (Yahoo) to illustrate a PLRINCIPLE of what will most likely happen to the financials. In other words, you've got to buy when everything looks likes it's going to fall to pieces. If you wait for things to look like they are going to pull through, you will have missed the bottom.

    Can anyone tell me how insurers such as Radian Group and Magic Investments are different from banks or... are they the same? I'd really appreciate knowing that.

    Reply | Link to Comment
  •  
    Aug 22 07:56 PM
    Ps.
    The preponderance of investment professionals desperately trying to spin this crisis, as they sense their careers going down the dumper, is pathetic.
    Reply | Link to Comment
  •  
    Aug 22 10:17 PM
    The article has merit, if one assumes that current circumstances are simply a rehash of what has happened in the past.


    My money is bet on that, which pretty much guarantees that we are now writing new rules for future generations to ponder - LOL!


    :)
    Reply | Link to Comment
  •  
    Aug 22 11:19 PM
    "Well, it's been down a long time, so maybe it is near the bottom. When it hits the bottom it will go up, and you don't want to miss that. Of course, you might disagree, which would be OK with me, because that would imply that I'd actually said something."
    Reply | Link to Comment
  •  
    Aug 22 11:53 PM
    I would happily buy if I could be convinced that gearing up 30x on ultra cheap money were a sustainable business model. Yes, a lot of financial companies are cheap to book. But what's the business look like? How would these companies do in a gold standard regime? How would they do in a full reserve system? When we do fundamental analysis on non-financial companies we look at their business, how robust it is, how well it would withstand shocks. We use conservative estimates and take nothing for granted. Well, the same approach for financials is a full-reserve, gold-based system. Not one would survive. You want to trade them, fine - I'm right there with you. As investments, they're all worthless, dependent on a corrupt and hopeless monetarist system for their continued existence. The worst thing an investor can do is look in the rear view mirror when choosing companies; the central banking, fiat money, fractional- (or no-) reserve system is in that mirror. What do you see out the windshield? As always, it's frosted glass. Winners see the worst and buy into those who will survive that and thrive on it. Losers assume it's a lot like what's in the mirror.
    Reply | Link to Comment
  •  
    Aug 23 02:56 AM
    "We all know the crisis will end". Agreed, but how? Like Argentina, Russia, Zimbabwe, the Ottoman Empire, or in flames like Rome? Nukes are becoming scary again.
    Reply | Link to Comment
  •  
    Aug 23 05:45 AM
    This is the crisis, getting old, but not going away:
    The US owes $9,610,000,000,000. That's over 9 thousand billion, and climbing.

    Who will pay it, the tax-paying wage earner, whose numbers are shrinking every month? That would be nice, but the private sector owes another $43,000,000,000,000. That would be 43 million million.
    And you think we can afford to waste resources on a profitable "financial sector"? What alternative energy source has it invented? Derivatives cubed? We will be smarter, cut out the middle man, AKA parasite, and invest directly in companies that produce tangible goods. Wall Street is over.
    Reply | Link to Comment
  •  
    Aug 23 11:48 AM
    Plenty of less risky, beaten down sectors to invest in here, especially SOX/tech stocks; why risk playing in a garbage dump? The rotten smell alone is enough to make you dizzy, and falling-cleaver catchers like Bill Miller are bleeding examples of losers who bet too soon. Avoid this sector and the kool-aid salesmen pitching it.
    Reply | Link to Comment
  •  
    Aug 23 01:09 PM
    I reviewed a lot of published stuff for the past 12 months and see that once we were "contained", then the 2nd half of '08 would see the beginning recovery, now we "uncertain" and "maybe" half done. Bankers are not smart enough to know where they are and most intelligent ones are in other industries. No transparency then no buy. Statements on CNBC saying "it really hard to analyze Big banks" are useless as are their accountants. Everyone is just ponying up to the chow line, poor ignorant homeowners, banks, broker/dealers and next the autos followed by the airlines. We don't need to worry if Nobama wants socialism, we seem to already have it.
    Reply | Link to Comment
  •  
    Aug 23 04:32 PM
    Great post texasgolfer
    Reply | Link to Comment
  •  
    Aug 23 10:25 PM
    Thank you Georgev Bush for bankrupting America, and screwing up the world you jackass.
    Reply | Link to Comment
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