Thursday, August 09, 2007

Harsh Punishment and Bank Stocks KBE

Too much hard work getting this small business off the ground has kept me away from blogging, but I hope to return to a more normal schedule soon. If you really want to punish someone force them to keep a diary.

All in I think this is an interesting time for investors as recent market dislocations have created some impressive buying opportunities, especially for stocks tainted with subprime exposure. There is real difference between an operating model that is core focused on sub prime activities vs various other businesses that are weakly linked or opportunistic investors in that market. See Why Wilbur Ross Likes Subprime. I agree with everything he says, except the part about gold. Gold has negative carry while TIPS pay cash interest.

Right now is the best time in recent memory to be buying bank stocks (KBE) and other credit sensitive investments. Wider credit spreads mean more return for each unit of credit risk. Banks are very lucky (well situated) in this environment because of their access to funding via FDIC insured deposits.

5 Comments:

At August 28, 2008 7:26 PM, Blogger Vikram P said...

Dear Blogger,

My name is Vikram P and I work for Wikinvest.com, an investing wiki with research about companies and concepts like oil prices and the credit crunch. I've been approaching top bloggers identified by our business development team about the Wikinvest Wire, a traffic-boosting, invitation-only blogwire for investing and finance blogs. Let me know if you're interested at vikram [at] wikinvest [dot] com and I'll get back to you with more details.

 
At October 11, 2008 8:08 AM, Blogger Steve Selengut said...

Not just Bank Stocks!

Investment Grade Value Stocks At Ten Year Lows

There has never been a correction that has not proven to be an investment opportunity. While everything is down in price, there is actually less to worry about than when prices are historically high. More money has been lost by people who bought into last year's markets than by those who will buy into this one, at this stage of the correction. When the going gets tough, the tough go shopping.

Every correction is different, the result of various economic and/or political circumstances that create the need for adjustments in the financial markets. This correction is worse than most that I've experienced, but the doom and gloom scenarios many have been pushing are unlikely to come to fruition. Once the media elects a new president, they'll just have to start reporting better news: 96% of all mortgages are current sounds a whole lot better than 20% of all sub-prime mortgages are in trouble.

Some fundamentals in many excellent companies have eroded significantly (due in part to accounting rules that are being changed), but for the most part, interest payments are being made and few dividends have been cut. Bargain prices abound in both the equity and fixed income markets and interest rates are historically low.

A cocktail of credit market laxatives is working its way into a constipated world economy. Relief is on the way. Today's prices may well be looked at as the lowest of the next ten years! Here's a list of things to think about or to do while Investment Grade value Stock prices are at ten-year lows:

Don't beat yourself up by looking at your account market value. You should expect it to be down significantly because all security prices have fallen. Look for ways to add to your portfolios---that's what the smart guys are doing.

Keep in mind that someone is buying the individual shares that the others are selling. The buyers will hold on until they can turn a profit, and the cash on the sidelines will eventually find its way back into the markets as prices rise.

There are no crystal balls, and no place for hindsight in an investment strategy. Buying too soon, in the right portfolio percentage, is nearly as important to long-term investment success as selling too soon is during rallies.

Take a look at the future. Nope, you can't tell when the rally will come or how long it will last. If you are buying quality securities now, as you certainly should be, you will be able to love the rally even more than you did the last time--- as you take yet another round of profits.

As, or if, the correction continues, buy more slowly as opposed to more quickly, and establish new positions incompletely so that you can add to them safely later. There's more to "Shop at The Gap" than meets the eye, and you may run out of cash well before the new rally begins.

Cash flow is king, so take smaller profits sooner than usual as long as there are abundant buying opportunities. Today, nearly eighty percent of all Investment Grade Value Stocks are down more than 15% from their 52-week highs.

In looking at your income securities, cash flow is the primary concern; as long as it continues unabated, the change in market value is merely a perceptual/emotional issue. A loosening of the credit markets should move CEF prices back into normal ranges.

Note that Working Capital keeps growing in spite of falling prices. Examine your holdings for opportunities to average down on cost per share or to increase your yield on fixed income securities.

Identify new buying opportunities using a consistent set of rules, rally or correction. That way you will always know which of the two you are dealing with in spite of what the Wall Street propaganda mill spits out. Focus on Investment Grade Value Stocks; it's easier, generally less risky, and better for your peace of mind.

Stop examining your portfolio's performance in market value terms--- it leads to fearful, often frantic, decision-making. Keep your asset allocation and investment objectives clearly in focus and try to think in terms of market and economic cycles as opposed to calendar quarters and years. The Working Capital Model provides a calmer way of dealing with portfolio dislocations during severe corrections.

So long as everything is down, there is really less to worry about. This is the result of panic selling by ETF and open-end mutual fund owners and the beginnings of year-end window dressing by fund managers.

Corrections, regardless of cause, will vary in depth and duration, but both characteristics are only clearly visible in rear view mirrors. The short and deep ones are most lovable; the long and slow ones are more difficult to deal with. If you over-think the environment or over-cook the research, you'll miss the after-party.

Unlike many things in life, Stock Market realities need to be dealt with quickly, decisively, and with zero hindsight. Because amid all the uncertainty, there is one indisputable fact that reads equally well in either market direction: there has never been a correction/rally that has not succumbed to the next rally/correction.

Get out there and buy low for a change.


Steve Selengut
http://www.kiawahgolfinvestmentseminars.com/
http://www.valuestockindex.com
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

 
At May 18, 2009 3:37 PM, Anonymous Evans said...

Hi, what happened? It has been a very long time - to be exact, almost 2 years. Was a follower of your blog, but have now started mine having enjoyed your posts.

Thanks for all those great posts :)

 
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At November 14, 2009 7:55 PM, Anonymous Anonymous said...

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