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Going down again!


Mandeep
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I've seen this sentiment from so many people who have seen these stocks survive, seen them rally 100%+, and have just been saying, "I'm waiting for the next pullback to get in."

 

For this this precise reason we will not see a severe pullback.  There is still a ton of cash on the sidelines, people who saw the last rally and sat out with regret, and now are just waiting for a pullback. 

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The driving force behind WFC and USB going to single digit is now mostly gone.

1st quarter result proves some of these banks have the earning power to build reserve and take charge off.

 

But everything is possible.  ;)

 

If WFC and USB go back to 11, that will be because some other driving force, at that time, u may not have the courage to buy. :)

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Markets shouldn't have rallied like that in the first place.

No fundamental justification, the business models of the banks (option-ARMs, MBS, no documentation lending, securitization) have been completely destroyed, we aint going to see 04-07 type growth for at least 5 years or so.

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Mandeep,

 

Here's an old joke that my dad told me (http://everything2.com/title/wise%2520old%2520bull).  Don't get too excited about doing something, or you might do a half-assed job.  :D

 

Insert Warren Buffett as the old bull and he's been telling investors for years that investing is simple, watch lots of pitches, swing at the fat ones.  He also tells us that his worst investing mistakes were the ones of omission.

 

From the Berkshire annual meeting in 2004:

When a shareholder asked for Buffett's worst mistake in recent years, he answered: Wal-Mart.

 

"I set out to buy $100 million shares of Wal-Mart at a [pre-split price of] $23," recalled Buffett. "We bought a little and it moved up a little and I thought maybe it will come back a bit. That thumbsucking has cost us in the current area of $10 billion."

 

Cheers,

 

-O

 

Guys, get ready to buy, buy, buy.

 

I'm excited and ready to pull the trigger this time.

 

USB, WFC under 11 are mine! muhaha

maybe I will pick up some BAC too.

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>The business models of the banks (option-ARMs, MBS, no documentation lending, securitization) have been completely destroyed

 

Yes, we are going back to the traditional simple model - grab deposit and loan out carefully to earn spread, cross sales some insurance and services to earn fee - which banks like WFC and USB are good at.

 

The other side of the coin you didn't mention is the elimination of competition and the future pricing power because of that.

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Wrong, wrong, I DID Buy USB @ 8.62, just didn't buy at bulk, and at 11 but I sold.

Bought BAC at 6 and 7 and sold at 14.88.

 

Trust me. I will have the courage to jump in. I'm busy saving cash right now....

 

 

 

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I dont know why people persist in thinking the business cycle is dead.  Last time I looked things proceed in the following order:

 

 

Stocks crash; bonds rally; jobs are lost; there is a recession

Companies trim expenses; debt gets paid down - quicker than people think - cash flow starts to return;

commodities rally; (we are here right now)

stocks start to rally - bond yields are now too low (the rise in stocks to this point has been a reversion out of an oversold position)

The economy picks up and you are in a new bull market.

 

I dont think there is a chance in hell you will see WFC at 11 or GE at 8 again, in your lifetimes.  That opportunity is past.  Its back to good ole value investing now where you pick and choose undervalued situations. 

 

There are certainly still some real good opportunities but nothing like the deals in March. 

 

 

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Really not a chance?

 

Remember WFC's low was not 11, but 7.50. GE's low was 5.71.

People called the bottom last october and then other people called the bottom in november.

Actually the bottom for GS, MS was in Nov, so you might be right.

 

I will start nibbling on WFC at 13, USB at 11, and GE under 10.

I own GE at 10 already, and USB at 8.60.

 

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I dont know why people persist in thinking the business cycle is dead.  Last time I looked things proceed in the following order:

 

 

Stocks crash; bonds rally; jobs are lost; there is a recession

Companies trim expenses; debt gets paid down - quicker than people think - cash flow starts to return;

commodities rally; (we are here right now)

stocks start to rally - bond yields are now too low (the rise in stocks to this point has been a reversion out of an oversold position)

The economy picks up and you are in a new bull market.

 

I dont think there is a chance in hell you will see WFC at 11 or GE at 8 again, in your lifetimes.  That opportunity is past.  Its back to good ole value investing now where you pick and choose undervalued situations. 

 

There are certainly still some real good opportunities but nothing like the deals in March. 

 

 

 

You're right that the business cycle is not dead, but I think you're wrong about where we are.    With foreclosures and unemployment rising, and consumer spending falling, I think we're still somewhat early on in the first step.    Don't be misled by the blip in equity prices that was mostly driven by managed earnings and accounting tricks.   

 

I'm with Mandeep, there will be plenty of opportunities to buy at lower prices.  I think most people would have said the same thing about Wells and GE at those prices anytime in the past 10 years, but look where we ended up.   

 

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Guest Broxburnboy

what do you guys think about comm. real estate falling? That can't be priced in right?

 

I think commercial real estate will be the next shoe to drop, high mall vacancies (getting higher), downward pressures on rents,

falling consumer spending, shoppers moving to wal-mart and lower end mega stores away from suburban malls. Manhattan

office and retail rents recently off at least 15%, continuing credit problems.

I ordinarily would not short or try to time the market, but have actually taken a small position in SRS, the CRE Ultra Short ETF, looking to

trade into a coming market reversal, where CRE stocks should lead the charge downward.

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SRS is a mistake. 

 

Look at the largest components of SRS over time.  Create a graph in Google Finance comparing PLD, REG, SPG (which 9 months ago were the largest components of SRS and the largest, I think, companies in their sub-industry) with SRS and you'll see that in the last year:

 

SRS is down 70.28%

PLD is down 88%

REG is down 55%

SPG is down 53%

 

  ???

 

Cardboard put it best-  "SRS is broken"

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Hi Pof4520,

 

How have you been?

 

You are absolutely correct. These 2X or 3X ETF's are mostly garbage. SRS is one among many. If you have been following the financial sector, look at FAZ for fun!

 

If there is a relief rally going against you with these instruments, you will lose all your gains and likely more even if the sector is going up only 10% after being down 30 or 40%. You have to be dead on with your timing and capable to get out quickly when the momentum shifts. Very quickly! This seems especially true with the short ones. It is highly frustrating to be dead on with your predictions and weeks if not months of sweating, then to see all your gains evaporate in a matter of days.

 

Dengyu was saying that there is a downward bias on these instruments and it seems to make sense due to frictional costs and their inability to deal with high volatility. So shorting or buying puts against them seems to be the way to go. You can't sit long on these things.

 

So if one thinks that commercial real estate will go down, short the IYR or buy puts on it. If you are right, at least you will make money for sure. Then to "juice up" your returns, get ready to buy SRS puts once the downtrend seems exhausted. If you are good at judging the spike, puts with 2 to 3 months in duration seem enough.

 

Cardboard

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Also, to what extent do you guys think banks have written down their prime and jumbo prime portfolios?

 

I'm not really a bank investor, so I don't know how much of their portfolio these comprise.

 

However, I do know that out here in California, at the higher end, 750k+ with prime type of borrowers in good neighborhoods, prices are just starting to fall and foreclosures are just beginning.  I know percentage-wise in terms of loans this may be small, but the loan values are just so huge, it must have a substantial impact.

 

I somehow doubt these have been written down, considering the "aggressive" accounting that's been taking place.

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There has been a moratorium on foreclosures for many of the banks.  They will need to go through these soon so expect to see a sharp rise in foreclosures in the coming months.  This will add further pressure to the housing market.

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Also, to what extent do you guys think banks have written down their prime and jumbo prime portfolios?

 

I'm not really a bank investor, so I don't know how much of their portfolio these comprise.

 

However, I do know that out here in California, at the higher end, 750k+ with prime type of borrowers in good neighborhoods, prices are just starting to fall and foreclosures are just beginning.  I know percentage-wise in terms of loans this may be small, but the loan values are just so huge, it must have a substantial impact.

 

I somehow doubt these have been written down, considering the "aggressive" accounting that's been taking place.

 

In most regions of the country the low end of the mkt inflated in value much more than the high end during the bubble years I expect that the percentage decline in the mid and upper ends of the mkt will be less severe than the subprime areas.  You will have losses on the high end stuff to be sure but it will not be as dramatic as the low end. If you have a mortgage book that is mostly jumbo's with decent down payments and you have reserved 30% you will be fine if your mortg. book leans towards subprime and you have nuttin down and you reserved 30 percent you are already bankrupt.

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In most regions of the country the low end of the mkt inflated in value much more than the high end during the bubble years I expect that the percentage decline in the mid and upper ends of the mkt will be less severe than the subprime areas.  You will have losses on the high end stuff to be sure but it will not be as dramatic as the low end.

 

Here in CA, less severe, for sure, but still pretty severe, probably -70% for subprime areas and -35% or -40% for prime properties, but still enough to leave the borrower underwater and the bank needing to take a write down even with 20% down.  I'm not all that familiar with non-CA real estate markets.  Is a CA-specific issue?  I know the Pacific Northwest - Portland and Seattle are trending the same as CA.  Or is it a coastal issue -- anyone know if NYC, Boston, DC, those kinds of places are trending similar?

 

If you have a mortgage book that is mostly jumbo's with decent down payments and you have reserved 30% you will be fine if your mortg. book leans towards subprime and you have nuttin down and you reserved 30 percent you are already bankrupt.

 

But have they reserved 30% on those jumbos, that's my question? Because what if they've reserved 1,2,3% on those types of loans based on historical default rates?  Or have they been already written down (I doubt it?)?

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Guest Broxburnboy

Cardboard, pof4520:

 

Thanks for the input regarding SRS.

I never short and my trading portfolio is within a registered account where shorting is verboten (I'm OK with that), but I am convinced that this general financial rally is in reality a pump and dump promotion by the main players in the Wall Street bailout initiative. It is not based on real fundamentals and thus has to turn, and it could turn fast particularly on a major negative event like the bankruptcy of California or other pending negative indicator.

So far SRS has responded to the daily fluctuations of the market in an expected manner, my position is not large and I will hold short term to see if my expectations materialize. If you know if any other way to play bearish within the trading parameters of a long only account, I would appreciate any input.

 

Cheers

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Broxburnboy,

 

If you are a Canadian (may work also in the U.S.), you can buy options in a registered account. You can also write covered calls. What you can't do is anything that requires margin. To be able to do this, you have to setup your account for this feature with your broker.

 

This may open other alternatives than simply buying reverse ETF's.

 

Cardboard

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Both Interactive Brokers and Thinkorswim are now in Canada.  Either one I'm pretty sure will allow options trading.  IB is super cheap but has some annoying minimum monthly charges and lousy customer service, TOS is a bit more, but still pretty cheap as far as brokers go, and has great customer service.  Neither have option levels so you can trade whatever kind of options you like.  That said I'm not sure how their RRSP accounts work. But in the US they allow options in IRAs..  May be work checking into...

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Both Interactive Brokers and Thinkorswim are now in Canada.  Either one I'm pretty sure will allow options trading.  IB is super cheap but has some annoying minimum monthly charges and lousy customer service, TOS is a bit more, but still pretty cheap as far as brokers go, and has great customer service.  Neither have option levels so you can trade whatever kind of options you like.  That said I'm not sure how their RRSP accounts work. But in the US they allow options in IRAs..  May be work checking into...

 

Neither Interactive Brokers nor Thinkorswim are currently offering RRSP accounts.

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