How’s that working for you?

Back in January, I posted a short article basically saying that it was way too early to call a bottom in financial stocks.  I had been reading an article on TheStreet.com by Doug Kass where he made the case that it was time to buy the financial sector, via XLF.  

While I agreed with much of his analysis, I didn’t think the financials were anywhere near a bottom – most banks and brokerages simply hadn’t taken into account the full impact of the sub-prime mortgage debacle.  Those relatively few bad mortgages were so highly leveraged that just a few percent failure rate is enough to make the whole house come tumbling down.

Despite the best efforts of the Fed, Bear Stearns has disappeared.  It took a $30 billion taxpayer backed guarantee to do it, and I think the buyout simply swept the underlying problems under the rug and out of sight – for a few months.

The last few months are looking more and more like a rehash of the Internet bubble and the resulting bear market from 2001 through 2003.  during that time, I lost count of how many times I heard things like “buy and hold”, “stay the course”, “this is a great buying opportunity”, etc. 

The people who listened “to the experts” back then STILL aren’t back to even on their investments, while those who got out and waited for the smoke to clear are way ahead.  Those of us who are conservative investors, who follow broad trends and don’t move in and out of the market very often know that this isn’t the time to buy back in.

Could this be the bottom?  Sure – but I don’t think so.   I move in and out of the market in my 401K based on the crossover of the 75 day EMA and the 200 day EMA.  I usually go with an S&P 500 index fund, and here’s what the chart looks like today.

The 75 and 200 day EMA’s are nowhere near signaling the start of another bull market, so my retirement money is 80% in cash and 20% in overseas funds.  I’m down about 4% for the year – how’s your 401K YTD? 

If you’re still fully invested (like the “pro’s” tell you to be) you’re down over 12% YTD, and you’re right back where you where in July of 2006.  If you’re retired and you’ve been fully invested for the last decade, you’re right back where you were in March of 1999. 

9 plus years and zero return – how’s that “buy and hold” strategy working for you?

Anyway, it’s time for a check on Mr. Kass’s buy call on XLF.  I normally don’t make a big deal about stuff like this – after all, analysts make bad calls everyday – but he titled his original analysis “Buy the Financials. Yes, Buy” to emphasize what a great opportunity it was.  So, let’s see how XLF is doing since Jan 14th.

XLF closed at $27.88 on Jan 14th.  It closed today at $20.57.  That’s down $7.31 – or about 26% in about 6 months. 

Great timing on the “Buy the Financials.  Yes, Buy” call Mr. Kass!  I hope you haven’t screwed over too many investors with your advice.

In my original post, I made this prediction: “In my humble opinion, we’re heading into a very rough period for almost all asset classes, but “soft” things like made up financial assets and corporate profits (measured in the dollar) will fare much worse than “hard” assets, such as commodities.”

Since I recomended investing in commodities instead of stocks, let’s see how my pick (gold) is doing.  Gold closed at $903.40 on Jan 14th, and it closed today at $931.30.  That’s up $27.90 – or about 3% in 6 months.

Yup, gold is up just a tad, and it’s actually off the highs of a few months ago.  It’s also just come back up over $900 after being stuck in the $860 to $890 range for a while – I mention that because it just came back up this week, and I don’t want to appear to be trying to hide that it’s been lower.

But as long as the Fed keeps printing extra money (inflating the supply) the dollar will keep falling, so gold will continue to hold its’ value for now. 

Only if Bernanke gets serious about fighting inflation and ensuring a stable dollar (which is the Fed’s primary purpose – read the Fed website if you don’t believe me) will the dollar rebound and gold fall.  And “Helicopter Ben” isn’t Paul Volker, so it ain’t gonna happen anytime soon.

For you too young to remember the late 70’s, inflation was high and the economy was stagnant – the term “stagflation” was coined to describe it.   We’re in the early stages of it now, and unless we get the Fed to grow a pair of brass balls, it’ll be 1980 all over again.

Raising rates and restricting money supply killed the stagflation, but it also caused a deep recession.  But that recession led to one of the greatest bursts of prosperity this country has ever seen.   We can do it again – if the Fed would administer the medicine.

As is stands, Bernanke is simply trying to keep a sinking ship afloat.  He doesn’t want a deep recession (or worse) to mar his tenure.  After all, he is an “expert” on the Great Depression, and he know’s what he’s doing.  Just like the experts calling repeated bottoms in the stock market.

I didn’t come up with any of this on my own.  Read  Warren Buffett’s annual letters to shareholders.  Read Phil Town’s “Rule #1”.  Read damn near anything by anyone who isn’t a Wall Street “expert”.  Their jobs are going away as the companies they work for are revealed to be a highly leveraged house of cards.  They’re running scared and are trying anything to keep up the pretense of the 80’s and dot com years.

What about the next 6 months?  I don’t see the financials (banks and brokerage houses) coming clean with their books yet – many are still pretending that their “level 3” securities are still worth a lot of money.  Until they ‘fess up and take the losses they’ll just be on a long slow bleedout. 

This part is simply a guess, but I think Goldman Sachs is priced way too high.   At some point I think they’ll come down to earth just like the rest of the investment banks.  This might sound “out there” but I would not be suprised to see GS lose 50% (or more) of their value over the next 2 years.   Maybe sooner.  Something is fishy in their financial statements, but I can’t put my finger on what.  Just doesn’t smell right….

Back to the “hard vs soft stuff” that started this.  Don’t take my word for it – read and look at the situation for yourself.  Decide where to put your money because YOU want to put it there – not because some so-called “expert” on TV or the Internet said “Buy the Financials.  Yes, Buy”.

gk

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