The Stock Surfer

Breaking News: Attempts To Call A Bottom In Financials Unsuccessful

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Note: This article posted simultaneously at www.thestocksurfer.blogspot.com.

Everyone wants to know when the financials will bottom. Despite many guesses and months of speculation by experts on CNBC and amateurs in my office, no one really knows. The folks at Investor Place Blogs have asked me several times to write on the prospects for financial stocks, and every time I have given a similar response. I'm going to review those responses below, not for the sake of saying, "I told you so," but for the sake of putting the discussion into context. The context is this: Despite many guesses and months of speculation by experts on CNBC and amateurs in my office, no one knows when the financials will bottom and all attempts up to this point have proven premature, if not foolish.

LEHMAN

At the beginning of June, I was asked about Lehman Brothers (LEH). I wrote:

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.

Back then, LEH was trading up around 33. Today LEH will open around 14.

BANKS

Around June 24th, I was asked to comment on the banks.

The banks are at the epicenter of our financial crisis. Other than making a very short term trade, what is the investment strategy of buying bank stocks here, other than the hope that it can't get any worse?

The S&P banking index is down around 9% since then, which is not terrible. Unless you held Indymac stock (the bank failed on July 11th). But can it get worse? Maybe not, but consider this from the Wall Street Journal today:

New Credit Hurdle Looms for Banks
By CARRICK MOLLENKAMP
August 27, 2008; Page A1

U.S. and European banks, already burdened by losses and concerns about their financial health, face a new challenge: paying off hundreds of billions of dollars of debt coming due.

...The Federal Deposit Insurance Corp. said on Tuesday that its list of "problem" banks at risk of failure had grown to 117 at the end of June, up from 90 at the end of March. FDIC Chairman Sheila Bair said her agency might have to borrow money from the Treasury Department to see it through an expected wave of bank failures.

We should not be surprised if there are more bank failures. Why invest there?

AIG

On August 7th, I was asked about AIG, and I wrote.

I do not pretend to know anything about credit default swaps, but I know what I don't know, which is more than AIG can say. In the first quarter, they estimated $2.4 billion in losses as a worst-case scenario. Now, evidently, the worst case scenario has doubled or tripled. Just stop and think about that for a moment--they underestimated their worst-case scenario by as much as 6 billion. Until further notice, AIG has no credibility whatsoever.

Back then, AIG traded above 25. Today it opened at 19.66.

CONCLUSION

Trade financials with caution. When there is extreme panic, you can buy them for a trade if you like using the XLF or UYG (double long). But be careful, a bank could fail tomorrow and send the sector down. When they show strength, you can bet against them for a trade using the SKF (double short). But be careful, the government could step in and send the shorts running. Either way, be careful.

Disclosure: I'm long SKF.