Wednesday, April 9, 2008

Capitulation - Is it Time to Buy the Financials? Yes!

The market took investors on another wild ride today, reeling from the news that Bear Sterns has collapsed and Lehman Brothers may be next. The news has been horrendous in the prior months and I've shunned financials as a result. However, at some point, there will be a bottom.

There are two certainties here:

1) Markets over-react. Investors that enter the market in the trough will stand to do quite well when it's clear that the worst is behind us and all the money on the sidelines rockets stocks (especially the financials) back up again.

2) Neither you or I will perfectly pick the bottom. The best investors in the world cannot consistently pick peaks and valleys and for the long term investor, you're best served in being in the market more than you are out. In my trading account, yes, I did pull money out months ago, exited China in large part and pulled out of trend momentum stocks like Garmin and Crox. Conversely, I played with Platinum and got burnt in Stillwater Mining (SWC).

I have an admission to make: I'm back into Financials.

I took a 10% stake in the leveraged Financials ETF UYG. My move was based on several factors:

  • Aside from the points above, investors are simply running out of places to put their money.

  • A commodities bubble is forming and while I'm playing now, it will eventually burst and I will soon be taking profits, at least in 50% stakes.

  • Treasuries are now yielding negative values when accounting for inflation. TIPS yields are inadequate based on how the government calculates real and nominal inflation.

  • Given the supersonic oil prices of late, many oil exporting countries need to diversify their holdings and are doing so in force with sovereign wealth funds. I am sure that these funds will soon be flowing into financials and I want to catch that wave.

This is not to say the Financial sector is not without risk. If you look at a 6 month chart, there appear to be multiple ideal entry points only to be followed by another low. There could be more to come. But I'm looking at a significant rate cut coming tomorrow aimed at an industry that the government simply cannot and will not allow to fail. This is an artificial floor no? This clearly differentiates the industry from say, the internet bust earlier in the decade, which saw no mercy and complete annihilation.

If you're looking for some additional options to ride out the storm, here are several options for commodities plays and double digit yielders you may want to consider; some of which are outlined in my high yield self-directed IRA portfolio.

13% Yielder

Ridiculous Yielder - Another Financial at 30% plus

Wrestling with an 8.4% Dividend

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