Sometime yesterday I saw a graphic showing Lehman Brothers down 75% and I thought about the above speech. We also know the drop at Fannie and Freddie is in the 90s.
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. Here is a video I did in December, 2006 (about 5 minutes 38 seconds in) and another one in February 2007 (about 8 minutes 8 seconds in) in which I talk about subprime and actually mention names that were already in trouble and ended up failing one way or another.
Ok, the button to embed a link seems to not be working so the exact dates for the videos are December 23, 2006 and February 10, 2007 for anyone who cares to click through to the archives.
At some point a crisis ends. We all know the financial crisis will end, we don't know 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 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 down side estimate or not but the way I view it the down side 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.