Still Uncertainty in Financials
Financials are doing well even with news that would have normally sent the shares of companies in the sector on a downward spiral. The earnings of banks are off by a long shot even in comparison to just last year. We're also seeing write offs left and right. Last month when Bear Stearns basically went out of business and calamity was predicted, the market barely budged (the S&P 500 was down less than 1%). Lehman Brothers announced to the market that it had taken action to sure up its liquidity by raising $4 billion in capital. Why would the firm have done this if it wasn’t in trouble? With all the bad news coming in and undoubtedly more bad news in the near future it's interesting that the stocks of financial companies have actually done well. What one might garner from this is the sector has turned a corner. So does this mean we should all go out a buy a bunch of financial stocks? Quick answer: NOPE!
My guess is we’re in a period where financials will oscillate. I for one still need to see more information coming in and how the market reacts. For the moment, I’m short the sector (SKF). It’s important to keep in mind the stock market discounts the future, meaning future information and events are usually accounted for in the stock’s current price. An investor’s job is to assess the probability of those future events actually occurring. How well one does that is where the money is made. Right now I’m betting things will get worse before they get better.
Disclosure: I and the clients of Brick Financial owned shares of ProShares Ultrashort Financials ETF (SKF).
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