Why Sovereigns Are Buying Our Financials - They're Cheap

As the debate now "roars" about whether or not US equities are headed for a general bear market, we all know that the financial sector has been there for some time now. Indeed, the Financial Sector SPDR (XLF) ETF is down some 25.7% from January 1, 2007 through January 16, 2008.

This week's news once again features prominent and sizable liquidity facilities provided to our US banking institutions by foreign sovereign funds. As shown below, from the foreigner's currency adjusted perspective, these securities are an even better "bargain", with the XLF down more than 30% when stated in Euro and Yuan, respectively. 

If you believe foreign central banks will soon start lowering their lending rates along with ours, and that the US is closer to a price floor than our relatively high flying foreign market counterparts, it is easy to see the attraction. This is especially true with choice preferred stock dividend rates approaching 10% on the bargaining table. 

Who would have guessed just a few short years ago that our securities would so soon become the global "value-play"? Billions of US investment dollars are reported to have moved into overseas equities during the last several years. I wonder if the ultimate "put" for the US markets will end up being the reversal of that flow?

Comments

[Kunst]

The financials will be first to turn up, but I don't think it's yet.

[likin' Kass]

I'm thinkin' that the financials, especially XLF, purchased Tues. or any time near these levels will result in a two banger maybe more. 2 years at least. Put it in a drawer and go on about your life. Maybe I'm just talkin' my book...:)

[Reinko]

This article is not well thought through; foreigners buy US financials because they are stupid. With some months waiting they will get far better deals compared to now.

And do you know why that is?

Because the entire US financial sector will try to pick up debt in 2008 in the order of magnitude of 2500 billion US$.

Don't believe me?

This is easy to proof:

Go to the Federal Reserve flow of funds sheet, here is the link:

www.federalreserve.gov...

Go to the one before last column (total domestic financial sector debt) and scroll down until you get the last two numbers.
They say, total debt is

2007 Q2 = 14855.0
2007 Q3 = 15435.3 billions of US$.

Since 15435.3/14835 = 1.039 we have 3.9% Q on Q.

Thus a yearly estimate of 1.039^4 = 1.166 thus 16.6% Y on Y.

And 16.6% of the latest known 15435.3 billion is a rough 2500 billion US$.

So if those foreigners would have done their homework they would have waited a few months.

I am very sorry Jeff: Try this article once more and include some easy to understand calculations from the flow of funds sheet in it.
Because now it is crap while it could have been a good article...

Good luck with it!