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Avoid Lehman (LEH)
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As I write this on June 3, Lehman Brothers (LEH) is heading straight down. People may ask, "Why now?" I only know rumors started after the Bear Stearns collapse that suggested Lehman would start to fail. Remember, on March 17, LEH hit a low of 20.25, about ten points lower than where it sits today. Clearly, this company has problems--some known, some unknown to the general public. As Dr. Phil says, "For every rat you see, there's ten you don't." The Bear collapse should at the very least make us wary of investing in companies that appear to be infested. For my money, financials are plague-ridden and to be avoided at all costs. The actions of the Fed have resulted in a quarantine of sorts. One could argue this quarantine prevented the disease of the credit crisis from spreading too quickly. As March panic turned into May complacency, volatility went way down and the cries of "The worst is over!" went way up. Oil took center stage and the financials moved down near their lows. The fall of LEH should get our attention. A quarantine is not the same as a cure. As an investor, I can't rely on a strategy dependent on Fedbailouts. Nor can I rely on company statements that their "books remain liquid." I've heard that one before. Therefore, with hundreds of stocks to choose from, I see no reason to play LEH on the long side. Unless you know something I don't, all indications are that LEH is sick and could create more problems for the sector. A better bet, in my opinion, is to give your portfolio a vaccination with the Ultrashort Financial ETF (SKF). Or, stay in cash and out of financials entirely. Disclosure: Position in SKF. | ||
How to Invest: Doing The Opposite and Playing Defense
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Over the weekend, I was thinking of George Costanza and how to invest in the market. Last week was certainly volatile, and I'm sure produced the kind of frustration for traders that someone like George could appreciate. But by following the George method of doing the opposite of what seemed right, you would have made money. Consider this: Since last Monday, June 9th, the market has gone the opposite direction of how it opened every day except for one suspicious exception, Friday the 13th. The right move recently has been to do the opposite and fade the open. George would be proud. Of course, that only works for active traders and may not work going forward, but I found it interesting nonetheless. It's as if the market is trying to find a direction, and not succeeding. I have been quite bearish for a while, which hurt me in April but paid off in May. Since May 16th, the S&P 500 is down 4.5%, and more importantly the financials (represented by the XLF) are down 12.9%. On May 9th, I wondered aloud if the calm represented the top of a bear market rally, and it just goes to show that even a blind squirrel finds a nut occasionally. But how does one play defense now that we are back near our lows? Do we prepare for further downside, or anticipate an upside bounce? I have no idea. The easy downside trade (although it never feels easy at the time) is over, but there was insufficient pain, in my opinion, to justify a relief rally similar to the one we saw in March. Therefore, I'm trying to take a patient approach that will not lose me money in the short term as I wait for a fat pitch to hit in more extreme circumstances. What does this mean practically regarding how to invest? * Hedging. Cash is an excellent hedge if you are primarily a long only investor. For the more aggressive there are short ETFs, such as my personal favorite, the Ultrashort Financials (SKF) which goes up as financials go down. It's very volatile, though, so be careful. Posted (with video!) simultaneously on my personal blog, www.thestocksurfer.blogspot.com. | ||
