Friday, February 29, 2008
AIG smackdown = Get into XLF
While working on my playbook, I couldn't help but notice the AIG news today. AIG reported a $5.3 billion dollar quarterly loss today which has riled the markets. I have been watching XLF the last few days and think it is a good time to open up a position for the long haul. There is no need to over analyze this if you fundamentally believe in the long term sustainability of the US capital markets (which I do). I know this is hard to fathom at the moment, but XLF makes sense right now.
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2 comments:
i have been following your blog for a bit now. just wondering how you feel about the valuations/fundamentals in the xlf now? i'm almost tempted to say that there's nowhere to go but up from here.
thinkblue,
I honestly can not speak to the fundamentals of XLF and the big investment banks. These companies are highly leveraged, they borrow a lot in order to try and make a lot. Obviously that hasn't been working out well recently. Some of these companies (Merrill Lynch for instance) have had to conduct multiple writedowns on their assets, which means it makes it that much harder for analysts and every day joe's like myself to try and value them. Even a wide boxed-in value range is hard to come by.
Just last week Bear's CEO, Alan Schwartz said there were no liquidity problems and that it had $17 billion in cash. To burn up that much in just a few days makes it next to impossible to value them (Well JP Morgan values them at $2/share). Now throw in a multitude of other financial firms that comprise XLF, who also played the mortgage-backed securities game, and it makes the problem of valuation near impossible.
I took up a position in XLF because I believe in the US capital markets, it's systems, and efficiency in the way it adjusts itself over time. There will be regulation changes, lawsuits, and people summoned to capitol hill to testify when the dust settles. The point I am trying to make is that the US market system will find ways to correct these mistakes.
That being said, if your time horizon is short, stay away from the financials for now. I don't think the damage is finished yet. I have a long time horizon (a few decades or so), so taking up a position in XLF felt right. I also made sure that XLF doesn't represent a huge portion of my portfolio. I just hope the Bear Stearns employees who participated in their ESPP or 401k plans made the right decisions along the way to diversify. If they didn't learn their lessons from WorldCom and Enron then hopefully they will have learned their lesson now.
Thanks for reading.
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