Ironies in the Financials

Goldman Sachs (GS) is rallying along with the rest of financials. Ironically, in this backwards market, it has been a better strategy to buy the most putrid of stocks rather than the ones executing the best, because those who have been performing dismally from a business standpoint bounce the best from oversold conditions. So while Goldman has actually lost some price over the past few months, Morgan Stanley (MS) - which reported a far worse quarter - actually has outperformed by a long shot of late. Goldman is down from where it was two months ago whereas MS is up nearly 20%. The irony is great.

We started Goldman in April as a best of breed stock, which is still true, but as I said above, it would have been better to throw a dart at some of the refuse floating in the sewer in the financial pond, since when the market takes a sector up, almost everything gets bid up regardless of business fundamentals in this new era of "asset allocation" over "individual stock selection" and it takes the worst of breed up the most (along with short covering exaggerating the move). So we have to rethink things in this constantly evolving market. Further, I expect with Goldman's heavy commodity exposure they are going to look like a lot of hedge funds who suffered greatly in July. So there is some worry on the next earnings report since Goldman is considered bulletproof.

Long story short, until the market wants to give better return to those who stick in best of breed rather than worst of breed in these sectors, it makes little sense to own the best - it is sort of backwards but this is the way it is. We'll use Ultra Financial (UYG) for a proxy on the financial rebound instead of Goldman and consolidate the exposure we want with that vehicle instead of double hitting. We continue to streamline the portfolio and when one position can do the same as two, we'll cut it. This seems to be the case here.


We leave with about a $1100 loss as the stock of Goldman bounces sharply the past few days to now reach resistance.

The market continues to CHURN and continues to PUNISH anyone buying the breakouts. All those who bought this morning are now punished. Status quo. The rally in financials and consumer stocks is a mirage as far as I'm concerned - the consumer is not coming back at $3.79 gas, $3.59, or $3.29 no matter how loud the pundits scream. We have much larger systematic issues such as a housing disaster and credit crunch. And people should be asking what weaker oil really signals globally for an economy living on exports. The action between now and Friday's job reports is all random white noise and we continue to be unable to break above that 50 day moving average at S&P 500 level 1300. Just another day in the many days that all are the same the past few months. Commodities hit today, in 2-3 days they will be the darlings and run up 5-10%, and consumer stocks that are today's darlings will take a big hit. Take today's trades, and reverse them every 48-72 hours. Yawn.

Disclosure: Long Ultra Financial in fund; no personal position

Comments

[camquin]

Good piece mark.
What's your opinion: Will financials or international markets rally first?
Here's an article that discusses the topic and hints at the conclusion the financials will go up as international markets sink...www.greenfaucet.com/th...

[venividivici]

It tells me that this market is being driven by people with a "casino" mentality; they are gamblers not investors. And you know what happens to almost all gamblers in the long term. They end up losing their shirt.

[Filet Mignon]

The banks will eventually recover, everybody needs loans, business and consumer needs aren't going away any time soon. But what about the short term? I'm always reading articles about the need to raise capital. Is it wise to invest in banks in today's environment when they are desparately raising capital to survive?

[The Cynic]

It seems like the US banking sector is in for some longer term pain. I say that because of the whole slowly unravelling story about option ARM mortgages. perhaps WFC is in a better position than most since it didn't get into that line, and hopefully it doesn't own much paper based on such mortgages. But I read a bit the other day that suggests that banks in the Gulf Cooperation Council (GCC) are thriving largely based on petro-dollars. So far it looks like Asian and Middle-Eastern banks are relatively strong, but who knows with the whole unwinding of leverage that'll occur over next years. Perhaps its best to look at the most conservative of banks too, like some Canadian. Or of course just sit out of the whole sector if you're looking at the long side of things. Of course, you can play the down side too, which in this environment could be rather profitable.