The recent run-up in the financial sector, triggered by Lehman Brothers' (LEH) capital raising and announcements that UBS (UBS) will be writing off $19 billion, has led to a dramatic decrease in the ProShares UltraShort Financial Sector ETF (SKF). The SKF peaked around $150 in early March as financial companies' stocks were battered by rumors about Bear Stearns (BSC) being insolvent, and then the "come to fruition" moment when investors learned the true extent of their situation. Since then, the SKF has dropped about 33% and now trades around $100.
These circumstances have led me to compile a few questions that I am asking myself in order to understand why the markets think that the Financial sector is ready for an about-face. A few of these issues were recently mentioned on Reggie Middleton's "BoomBust Blog", which I find to be a very good source of independent thinking and analysis.
Reggie writes the following in his articled entitled "Now More Than Ever Requires Patient Investing" related to the extreme volatility we are witnessing in the equity markets, and how extreme volatility can be a signal of a coming drop:
Add in today’s fundamentals (residential/commercial real estate, leveraged loans, monolines, credit crunch, strapped consumer, probably recession, cyclical downturn in banking and real assets, multiple bubbles popping) and where you see the moving average going combined with the aggressive bull run you see we just came off of, and it looks like we should be prepared for a drop…
So, with the following issues (a cyclical downturn in banking, a housing market that still has yet to stabilize, leveraged loan, home equity loan, and credit card debt exposure, credit markets that are still tight, all-time high corporate profit margins, and consumers who are tapped out, not to mention rising energy prices), I am left wondering what those who have driven up market values of companies in the financial sector know that I don't? Or are they not buying on fundamentals at all, and rather HOPING that the worst is behind us?
I for one would prefer to invest my hard earned money on fundamentals rather than on hope. Hope may work well in campaigning for President, but in the financial markets, it is generally not a profitable investment strategy.
Or am I just completely missing something here? All comments are welcomed, and I appreciate challenges to my logic.
Disclosure: Author is long SKF
