About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Thursday, July 10, 2008

Financials Sector ($XLF)

My e-mail inbox is filling up with heated treatises about whether to
buy the financials in the wake of a year of searing losses or to punt,
figuring there are more searing losses to come.

The SP 500 financial sector Spyder (XLF) is down about 50% from
the record high set in spring '07. On a 12 month basis, sector net
per share is off about 90% through mid-year. The collapse of
earnings naturally reflects the subprime/CDO fallout plus the
ongoing substantial dilution to earnings from the replacement of
washed out capital.

In view of the collapse of earnings, capital impairment and the
leveraged financial structure of the sector, a 50% hit to group
value seems apposite. From a fundamental perspective, the XLF
deserves to be trading so low. However, the sector is spectacularly
oversold on a technical basis.

I think it is wisest to assume that 1) the system will be repaired and not
scuttled, 2) the repair process will take considerable additional time, and
3), that there will be additional hair raising incidents before the process
is complete. Repair should accelerate after GWB leaves office. The
laxity of regulation, the unpreparedness of Messrs. Paulson and
Bernanke, and the initial macho posturing of no bail outs by the GWB
crew puts this crisis a little bit a head of Katrina in the annals of
plutocratic indifference by the current resident of The White House.

It is reasonable to expect that the mere absence of mega writeoffs as
witnessed in Qs 3 & 4 of '07 and Q1 0f '08 will restore half of lost
net per share over the next 12 months. That would put the XLF at
fair value at the current price level.

I might be willing to take a flyer on this XLF pup on positive turns in
the 10 and 25 day m/a. There could be good 2-3 month upside if
it gets put into positive play. I shall pass it by until there are signs
of a positive turn in trend. XLF chart.

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