Wall Street Witch Hunt: Financials

We have all heard the term witch hunt before. During the 1950s, the House Committee for Un-American Activities was nothing less than a platform to roast individuals and organizations. While the Committee (with the help of J. Edgar Hoover) was able to produce evidence of "Un-American" activity, little to no wrong doing was ever found. Meanwhile, careers were destroyed, friendships lost, and democracy compromised. One of the lingering questions left from the Communist witch hunts was "What constitutes Un-American Activity?" In a time and era where almost anything goes, there is an opportunity to define... or even re-define what the United States stands for...

For instance, on November 18, 2008, we brought the credibility of BAC's CEO Ken Lewis into question. While it is the job of many CEOs to hype their company, and serve as the point man for new initiatives, Ken Lewis should be compared to nothing more than a snake oil salesman. Since then, BAC has refused to completely cut its dividend to shareholders. Sure the stock would get beaten up... but mergers with companies like Countrywide and Merrill Lynch come at a price.

Even after MASSIVE cash infusions from the first TARP program (approximately $30 billion dollars), it appears that BAC does not have the capital to absorb the Merrill merger after all. But if House Financial Services Chairman Barney Frank has his way, the fine folks at BAC will have their cake... and eat it too!!! If there is such a thing as Un-American Activity, this would be it.

Stock Watch

I entered new positions in SRS, EFU and SCC. SRS is currently trading at 67; its 52 week high is 295 and its 52 week low is 48.63. If you believe commercial real estate is in trouble, as I do, this is a good play.

FAZ, the financial bear fund designed to capture 3x the inverse of the financial sector, ran too fast for me too fill. TARP's failure to recapitalize the banks, to purchase distressed investments, means that financial institutions will need another round of beatings to come clean.

EFU: The European community in general, and the central bank in particular, are in reaction mode cutting rates. Fear is a phenomenal motivator... and they are scared in Europe.

SCC: A bundle of stocks related to consumer discretionary spending. If you believe Obama's stimulus package will fail to deliver relief, or feel that unemployment is headed to double digits, a number of stocks are doomed. This fund has pin-pointed those that will suffer.

FXI: I increased positions on the low-side...

MCRI: I increased positions on 6/5s puts...

Disclosure: Author owns SRS, EFU, SCC and holds short positions in FXI, MCRI

Comments

[Alan Young:]

I'm trying to find something useful here. "Witch hunt" is a perjorative term for a concerted but misdirected effort to find a scapegoat--I can't make out what your point is.

More substantively, your ETF picks seem highly speculative, if not completely misguided. SCC shorts the index whose primary components are WMT (14%), MCD (7%), HD (4%), CVS and DIS ... this is hardly "pinpointing" stocks that will suffer from consumers spending less lavishly. FAZ is a new experiment. We already know that double-inverse funds like SRS or SKF can have so much tracking error over time that in a month of tracking a volatile, down-trending index they can actually lose money--a lot! Holding a triple-inverse fund for more than a day or two is either wild speculation or bravado, not strategy.

Jan 18 03:43 AM

[PROXIMO:]

"I'm trying to find something useful here." GOOD LUCK.


On Jan 18 03:43 AM Aalan wrote:

> I'm trying to find something useful here. "Witch hunt" is a perjorative
> term for a concerted but misdirected effort to find a scapegoat--I
> can't make out what your point is.
>
> More substantively, your ETF picks seem highly speculative, if not
> completely misguided. SCC shorts the index whose primary components
> are WMT (14%), MCD (7%), HD (4%), CVS and DIS ... this is hardly
> "pinpointing" stocks that will suffer from consumers spending less
> lavishly. FAZ is a new experiment. We already know that double-inverse
> funds like SRS or SKF can have so much tracking error over time that
> in a month of tracking a volatile, down-trending index they can actually
> lose money--a lot! Holding a triple-inverse fund for more than a
> day or two is either wild speculation or bravado, not strategy.

Jan 18 02:35 PM

[George Simone:]

Re Aalan's comments on speculative ETF picks:
Obvously, he knows what he is talking about, but he is wrong claiming that holding triple or double inverse ETFs for more than a day or two is either wild speculation or bravado, but not strategy. There is a long list of inverse ETFs that have investors who had the insight to buy and hold these things months ago laughing all the way to the bank.
There is the Pro Share ULTRA Short Financial ETF - SKF, which if bought at roughy $80 a year ago could have been sold last November for $260, and even last Friday January 16 was still trading around $150. Or take the DB Commodity Double Short ETN - DEE. If bought last July at around $20, it could have been sold last Friday January 16 at $80. If bought at $60 at the beginning of last December, the DIREXION Small Cap Bear ETF - TZA sold at $140 by the middle of the same month.
There are many more examples like these which prove that holding inverse ETFs for longer than a day or two does pay if the trend warrants it. There are those of us who believe that if trading unleveraged ETFs or ETNs is good, then twice the leverage has to be better and three times better still. Leveraged ETFs with their daily rebalancing and greater volatility can work to a trader's advantage, "BUT" only on the right side of the market, be it short or long such as during periods of steady increases or declines of the underlying index. Be on the wrong side, and leveraged ETFs will quickly turn into weapons of portfolio mass-destruction.
This is why it is so important to constantly monitor support and trend-momentum of the underlying index and see when, how or even if a trend is developing.

Jan 19 10:04 AM

[PROXIMO:]

George-- Sure the double-inverse funds can reward if an investor's timing is right. The SKF you mentioned closed at 262.45 on 11/20/2008. Less than one month later, on 12/17/2008 it closed at 100.00., for a loss in LESS THAN A MONTH OF 62%. During that exact time period, the S&P 500 advanced 20.2%. You'll get far better odds at the craps tables in Vegas.

Jan 19 04:50 PM