Fears over sub-prime mean that no self respecting fund manager (managing someone else's money) wants to be caught owning financials if losses from sub prime CDO's end up spreading. Remember, fund managers' first priority is to keep their job. This means that they will walk away from good values if it mean that betting and being wrong will lose them their jobs. Luckily, the only person who's money I can lose is my own. That allows me to play a little smarter with the kind of risks I take.
Why Financial? Why now?
1. I've got backup insurance from the Fed: Although most market participants like to think that we operate in a free market unfettered by government interference, we do not. The Fed and the government is providing protection to our largest financial instututions. The Fed will bail out banks and brokers, either by lowering interest rates or fiddling with regulations, if things get too bad.
2. High dividend yields for bank stocks: Most of them are around 4% - that's what I get in my savings account. The dividends are better though, I get the tax advantage the Bush Administration has provided to rich people who live off dividends (sorry everyone else, you just get to pay for the Iraq War and lots of money for Haliburton (HAL) contracts).
3. Low P/E ratios in the brokers: The earnings may stop growing, but with most of them trading at or below a p/e of 10 you have room to breath.
4. Corporate Policy and Shareholder Resolutions: I'm hearing that next year there will be many shareholder resolutions about who many of these banks and brokers finance. If you have an opinion about China, Sudan, Coal Fired Electric Plants or the Rainforest you'll get to vote on shareholder resolutions regarding the issues next Spring.
What stocks am I owning/watching?
I've owned Citigroup (C) ($50.27) since 1989 (thanks to that student loan meant to pay for a root canal and crown that went into Citibank shares instead).
Of course, I have ownership exposure to my previous employers through executive compensation (Lehman Brothers (LEH) $68.07, Morgan Stanley (MS) ($66.82)). Recently, I bought JPMorgan Chase (JPM) ($46.49) and Bank of America (BAC) ($48.04). Yesterday, I sold puts on the iShares related to the financial sector (XLF) ($35.13). I'm also short way out of the money puts (Jan 2008 90 Puts) on Bear Stearns (BSC) ($133.26). And now I'm watching Goldman Sachs (GS) ($205.04), Bear Stearns (BSC), Countrywide (CFC) ($31.51) and a slew of mortgage REITS for an optimal buying opportunity.
Disclosure and Confessions: I own C, LEH, MS, JPM, BAC and CFC. I am also short Jan 2009 30 puts on XLF, short Jan 2008 90 Puts on BSC. Regarding my former employers where I held the position of Managing Director (Lehman Brothers and Morgan Stanley), I do not generally disclose my opinions, trades or positions in these companies.
I do not own GS or BSC, though I may buy them soon. I do not own XLF, though I may buy it soon. I own the following Mortgage REITS: NLY, LUM, ANH.