29 July 2008

Recent Readings on Financials

Henry Blodget at Clusterstock points out the litany of name investors who prematurely piled into the financials:
It seems safe to say that not all of America's financial-services companies will go out of business. In fact, over time, some might even recover a bit. So it's tempting to try to snap them up at the bottom.

Careful! Some of the smartest investors in the world have been trying to do this for the past 6-9 months, and almost al have gotten burned.
For example (WSJ):

Private-equity specialist TPG bought into Washington Mutual at $8.75 a share in April. The stock price Monday at 4 p.m. was $3.95. Warburg Pincus bet on beleaguered bond-insurer MBIA in January at around $12, after an initial investment at $31 a share. Monday the stock was at $4.27. A bargain-hunting fund recently launched by Fortress Investment Group is down about 30%.

A bunch of brilliant folks including Hank Greenberg bought Lehman (LEH) at $28 two months ago. It closed around $15. The list goes on.
Blodget then notes from the WSJ piece that hedge funds are raising funds and preparing to pour money into the sector:

John Paulson's Paulson & Co. is the latest to cause a stir, with plans to launch a fund late this year to make equity investments in financial companies. When a bear like Mr. Paulson senses bargains, it could be a sign that the worst is over.

Other firms, like Morgan Creek Capital Management and Credit Suisse, have begun raising money that they will invest with hedge-fund traders looking for cheap financial assets. Private-equity firms specializing in financials, such as J.C. Flowers & Co., also are raising money to make purchases, according to investors.

Barry Ritholtz posted a Barrons excerpt last Saturday, questioning whether the financials have bottomed yet:

In any case, the myriad woes of the credit system strongly suggests that the stirring stock market rally led by the financials in the wake of the Fannie-Freddie bailout and the crackdown on short-selling was mainly the product of short-covering.

Not exactly an original notion, but one well-supported by the data. Bespoke Investment Group points out that banks were the most heavily shorted group among the Standard & Poor's 1500 index in the latest short-interest numbers through July 15 -- the day the financials made their lows. Short interest hit 19.6% of an average bank stock's float; no doubt much of that has been bought back in the subsequent week. Last Thursday's wicked selloff suggested that's likely played out.

As the credit crisis prepares to mark its first anniversary, it's only fitting that the bulls claim the bottom has been reached. MacroMavens' Stephanie Pomboy notes similar declarations after bear-market bounces, as with the Nasdaq in 2001 and the Nikkei in 1990.

But, given the banking system's record exposure to real-estate assets, which continue to deflate, the fate of the financials -- and indeed the stock market -- seems tied to the housing market.

"As long as real-estate values continue to decline, banks will continue to frantically reduce their exposure," says Pomboy. " This is why it seems irrational in the extreme to anticipate a bottom in financials before the bottom in housing is in!"

Jason Zweig, also last Saturday but in the WSJ, invoked Graham & Dodd in questioning whether the financials are ripe for value investors, or are still solely in the realm of speculators:

You cannot even pretend to be protected against loss while real estate prices -- the wobbly foundation for most financial stocks -- are still crumbling.

Nor can you study the facts when it's unclear what the facts are. Each quarter, the banks set money aside in reserve against losses on their loan portfolios and say they believe those reserves should be adequate. The next quarter, they find out they were wrong. Loan-loss provisions at Washington Mutual, for example, have mushroomed from $967 million to $1.5 billion to $3.5 billion to $5.9 billion over the past four quarters.

The banks aren't lying; they're guessing. Whenever bankers talk themselves into believing that their assets are as liquid as stocks and bonds, they end up holding some stuff so rotten that you might not be able to unload it for a nickel at closing time in a fish market. That's why Graham warned decades ago that bank stocks are "a dangerous medium for widespread public dealings," prone to "absurd overvaluation" and "violent fluctuations." That's exactly the sort of warning people forget in financial boom times, as we had until last year – and in any bounce off the bottom, as we had earlier last week.

Financial CEOs could cast a vote of confidence in the future of their companies -- and give an immediate boost to the value of each share -- by buying back stock massively at these levels. Instead, share buybacks in the financial sector have fallen by two-thirds since the beginning of last year, to just $14 billion in the first quarter of 2008. Stuck in what Standard & Poor's analyst Howard Silverblatt calls "a state of shock and dismay," the heads of financial companies lack the cash or the confidence -- or both -- to buy in their own shares. If they can't or won't buy, why should you?

Don't get me wrong. I'm not saying there's no money to be made on financials in the next couple of years. But the potential for further losses is at least as great as the odds of big gains. When bankers themselves have no clue what their own assets are worth, there's no way most outsiders can determine which stocks are undervalued and which cannot be valued.

Barry Ritholtz is apoplectic after Merrill's write-down announcement just a week after they reported their quarterly results, devoid of any disclosure about this dilution.

Of course, on this news, MER rebounded, closing up 7.9% on massive volume. Makes perfect sense.

25 July 2008

Checking in on the Zacks Top 10 Stock Picks for 2008

Earlier this year, when I wasn't so focused on charts and trends, I evaluated the Zacks Top 10 buy 'em-and-hold 'em picks. On February 20, I made some decisions. Out of their ten suggestions, I admitted five outright, put three on the wait-list, and sent two off to their safeties. I even held shares in one pick ever so briefly.

So let's see how these picks are holding up since the delightfully chilled days of winter, and let's also compare them to the benchmark S&P 500.

To start, the S&P 500 has been pretty craptastic since February. On February 20, the S&P closed at 1360.03. Today, the S&P closed at 1282.19, down 5.7% from the 2/20 level.

A 5.7% loss is what we're trying to surpass. Will these picks lose less? Or perhaps even be in the black?

The five faves were: ALB, AMX, GME, HNP, and RIG.

How are they doing (excluding dividends)?

ALB closed today at $36.05. ALB closed on 2/20 at $40.15, for a loss of 10.2%
AMX closed today at $48.82. AMX closed on 2/20 at $61.39, for a loss of 20.5%
GME closed today at $42.56. GME closed on 2/20 at $45.74, for a loss of 7.0%
HNP closed today at $28.86. HNP closed on 2/20 at $33.76, for a loss of 14.5%
RIG closed today at $134.72. RIG closed on 2/20 at $138.73, for a loss of 2.9%

The average percentage loss for the 5 Zacks picks was 11%, about twice the loss of the S&P.

How about the three second-tier picks?

EMN closed today at $66.38. EMN closed on 2/20 at $66.73, for a loss of 0.5%
FLO closed today at $29.44. FLO closed on 2/20 at $24.09, for a gain of 22.2%
LDK closed today at $32.37. LDK closed on 2/20 at $32.60, for a gain of 0.7%

The wait-list outshone my preferred picks, as well as the S&P 500, with an average percentage gain of 7.5%

Now for the cast-offs:

CCE closed today at $17.04. CCE closed on 2/20 at $23.78, for a loss of 28.3%
CELG closed today at $73.26. CELG closed on 2/20 at $54.87, for a gain of 33.5%

The rejects eked out an average gain of 2.6% Thus far, CELG is the biggest gainer, and CCE is the biggest loser. Unintentionally, I somehow excluded the two outliers. Statistically, that's nice.

If you invested $1000 in each of the 10 Zacks picks, you'd be down 2.8%, not including dividends, which means you're sucking less than the S&P, but would've been better socking that cash away in an interest-bearing savings account.

If you found my analyses compelling and bought my five faves, well, you're lagging the laggard S&P. Sorry about that. I certainly hope you also followed my lead and didn't put your money in those stocks.

Now for the caveats.

My methodology does not take into account using technical indicators like RSI to time purchases.

Also, the Zacks thesis for these picks was to buy and hold them for a year, not for 5-months-and-change.

And today's tape was pretty pessimistic. Not exactly the most advantageous to evaluate stocks' performance.

The true test of the Zacks thesis, and these picks, will be next February. In the meantime, I'll continue posting on other, more interesting (and hopefully profitable) market miscellany.

19 July 2008

Financials Hit Bottom?

Barry Ritholtz questions the bottom calls in financials.

Floyd Norris in the NYT says:

The past year has not been a good time for most stocks, of course. But even on a relative basis, the financials have had their worst 52-week period ever. They had fallen by 31 percentage points more than the overall S.& P. 500 on Tuesday, a figure that was marginally worse than the two previous times that the relative underperformance reached 31 percent.
The fact that relative underperformance of 31 percentage points over 52 weeks has twice signaled a great opportunity in financial stocks does not prove that it will happen again, of course. But it does show that pessimism about the financial system had reached extraordinary levels. That could provide attractive prices if the financial system is destined to muddle through the current credit crisis.

These posts and stories confirm my belief that financials are a good bet in the short term. Ritholtz' and Norris' hedging skepticism keeps my finger on the trigger, ready to close out my UYG holdings if necessary. On that note, how does Assy McGee (pictured above) pull the trigger of his revolver?

17 July 2008

While I Was Away...

Just as I step away from the blog for a few weeks, the market plummets, the VIX crosses 30, and I start getting comments and questions about UYG.

I am riding out this bear-market rally with holdings in DDM and UYG. I built a position in UYG over the last couple of weeks at prices ranging from $17.90 to $23.75, for a cost basis of $21.81. I got to the party a bit on the early side, before Freddie and Fannie crashed the festivities and IndyMac upper decked the loo.

In the near-term, I'm looking to exit UYG as it approaches its 50-day moving average, currently at $25.43. (See chart below.) With MER's huge miss after the market's close today, I would be surprised if the upward trajectory continued without interruption tomorrow, but we have C reporting in the morning, so we'll see.

Notice the tremendous volume in UYG shares as it bottomed out at $14-and-change. That seems a good sign for the quick jump back to $20, aided by incredibly oversold conditions, our quasi-socialist government propping up the FM's, and JPM's less-sucky earnings.

Looking at the Dow (further below), I will strongly consider lightening up my long position if the Dow approaches its 50-day moving average, conveniently just above the 12K-mark.

Finally, a reader asked about the composition of UYG. Here's a link to its current top-10 holdings, and a link to its complete and lengthy list of holdings.

For more on the financials, I found this piece and this piece well worth reading.