Credit Crunch – Financial Stocks
It’s not often that we get to celebrate a win so quickly. We thought
the wave of recent news that supports our stance on the banking sector
deserves to be highlighted (as it may make or save you more money in the future).
In early November the popular financial press started commentating on
bank stocks. Some went as far as insinuating that investors should get
back into these troubled securities. At that same time, in filings with
the SEC, Eddie Lampert and Warren Buffet announced they had
increased their holdings in these very stocks. The news just added fuel to the fire.
We knew they were early . . . and we were right.
On November 2, and again on November 19, we published articles on
this very topic. “The Fall of the Banking Giants” discussed the major
write-offs the banks were taking from the subprime debt. It was then we first cautioned you not to touch these securities.
A few weeks later we published “Might Warren Buffet Be Wrong?” which discussed how Warren and Eddie had taken up positions in these banking stocks and how they were too early.
After more than 10 years working on “Wall Street” I know how hard it is
to pick the perfect bottom. Just when you think things can’t get any
worse another shoe drops and destroys market confidence.
This is exactly what happened in November and early December. Despite everyone thinking the worst was over, more and more bad news came out. Sub-prime woes, mismanagement, falling earnings, layoffs, shutdowns . . .it just kept getting worse.
In the last few days several more major announcements were made:
* UBS (UBS) – announced write-offs tied to subprime securities of
$10 billion. (Dec 10)
* Washington Mutual (WM) – announced a massive restructuring, firing
more than 3,000 employees, and cutting the dividend by more than 70% (Dec 10)
* Fannie Mae (FNM) – cut their dividend by 30% (Dec 4)
* Freddie Mac (FMC) – cut their dividend by 50% (Nov 27)
* Citigroup (C) took more than $7.5 billion from The Abu Dhabi
Investment Authority (very expensive money – I might add) to shore up a deteriorating balance sheet (Nov 26)
These announcements were devastating. Just look at the chart for
Washington Mutual. It is down some +20% since our first article. Citibank(C) is down more than 18%. The news has gotten so bad that the Federal Reserve lowered interest rates. In the long term these lower rates will help the banking industry, but for now they’re still struggling.
If you listened to us you no doubt sidestepped some of the dramatic drops the industry has experienced. Those of you who were more aggressive bought puts on these stocks. If you had purchased Washington Mutual puts, for example, you have more than doubled your money in less than 6 weeks!
I still get the question, “Is now the time to buy?” My response is
simple. Don’t try and pick the bottom. Be patient. Wait for all of the
news to shake out, and watch for the industry to rally. Wait until the
market is in an uptrend and never, ever fight the trend!
I plan to revisit the industry early next year and see if any bargains can be had. I advise you to do the same.
Category: Stocks
