It is is possible that "is now the time to buy financials" has been asked on TV everyday (literally) for over a year now and for anyone who views themselves as an investor (as opposed to a trader) the right answer has been no every time.Throughout all of this I have done very little analysis. I warned about problems long before they manifested themselves in equity prices because of distortions in the yield curve, which did matter, underweighted the sector and have continued to say that not enough time has passed to make any sort of fundamental case for taking on an equalweight position.
This is easily repeated by anyone in the future. "Hey the yield curve is inverted, that's gonna be some kind of problem for financials." That seem complex? Of course not.
With each week (or maybe each day) we get news of another set of writedowns, capital raisings and dividend cuts. This past week the market has begun to pay more attention to the regional banks as measured by the Regional Bank ETF (KRE). KRE held up better in the first few months of the year but has done worse over the last two months and diverged lower again in the last few days.
The shift in focus from the money centers to the regionals (if that statement is even accurate) would seem to represent a domino effect. Are there only two dominoes? It would seem unlikely. It makes sense to think the impact on the regionals (fundamentally) will get worse. There have been smaller banks that have failed as a result of all of this, perhaps those were the more aggressive ones, but the crisis will touch even the conservative small banks in one way or another.
The word delevering has popped lately, "we're going to see the banks delever." Delevering is an unwinding. It has started but it is not complete. I do not know what the full impact of that will be and fortunately I don't need to know. Correctly quantifying what happens next is far less important than what your weighting in financials is. If you agreed that this cycle's yield curve inversion would not be different and you underweighted the sector you already did the work you need to do.
For now the right thing is to wait.
I would not want to be zero weight, that is also a big bet. Just because it has been correct doesn't make it less of a big bet. One thing is right, most of the stock price decline has already happened. The Financial Sector SPDR (XLF) is down about 42% from the all time high. The full decline from the top will not exceed 84%. I doubt it will exceed 60% for XLF but obviously certain individual stocks are and will be a different story.
Not sure if I am the only one watching the College Baseball World Series or not but is there anyone who likes that Hootie and the Blowfish sounding OAR group that ESPN is bludgeoning us over the head with? Sweet mercy.
3 comments:
Roger,
I'm tying together a comment covering a couple of ideas generated by several of your recent posts - and probably showing my failing memory along the way - but...
You've repeatedly talked about the benefits of "missing" the down-a-lot scenarios. FWIW, I've been biased to the downside since March 2007 (losing most of a fairly good [t-]shirt until August/Sept, and climbing up past B/e since then).
At this point, I tend to agree with your view on financials (and am selling OTM puts to hedge my (possible) re-entry points) and am scouring other beaten sectors (too chicken to tread near homebuilders and real estate however).
What would you say, off the top of your head (unless you can point me to a recent blog where you discussed it at length) would you guess to be a range of expected long term returns of being fully invested in the market if (and it's a big iff) you avoid 2/3rds of every "big move down" and otherwise capture only 2/3rds of the up moves?
As for encore careers, I'm on my 2rd (its my third career). I began my working career as a performing artist (normal retirement age = 30) went back to school, worked in the markets for 15 years, and am now beginning a consulting career with hours and commitments built around my family. Much more rewarding (net net), even if the ($$) transition is somewhat frightening.
R
Rick, great question.
I will try to crunch some numbers because I have not thought of it in the way you frame the question.
What I can say now is that for people who save enough money "normal" equity returns over the long term should be be enough. The way I think of what I am trying to do is to get that long term average but with a smoother ride. You can visit the quarterly videos to get some sense of how that has gone.
One thought I just had, off the top...I think Hussman said the average bull market gain is 180% and that half of that gets lost in the bear phase. i am fairly confident in the half lost part but not so sure about 180% but using those numbers...
buy an index at 100 on day one of the bull and it would top out at 280. giving up half the gain takes it back down to 190.
using your 2/3 1/3 example you would buy the index at 100 and at the peak you would have 220. would 1/3 of the decline be 30? would that get you to the same 190? Well the ride is a little smoother if that is correct but I am not sure that is correct and capurting just 2/3 of the bull market with the equity portion seems very conservative.
i'll try to think some more on this but maybe there can be some reader input.
GE, is key. Cracking???
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