The Shadow Stock Trader
Tuesday, July 01, 2008
By Horacio Marquez
Email – #3
** In times of financial stress, I love financial assets
What a difference a few years make! Back on a terrible day in the summer of
2006, I was extremely nervous. Despite the fact that I knew that the market
offered huge fundamental value, I was afraid to buy it. As it cratered, I mustered
courage to do what I was terribly afraid to do, yet my training told was the right
thing, and I adopted an extremely aggressive stance.
I was handsomely rewarded that day, as the market reversed and actually ended
up. And I went on to make a lot of money in the next few months. I was lucky
then. Sometimes I was too early in similar situations, but I knew I was buying
$1 for $0.50, so I hung on and made similar killings.
Back in 1998, I had bought Russian bonds for a fund and these dropped
precipitously from an already ridiculous level. I knew that Russia would not
default and that the bonds were already trading as if it already had. The bonds
made a total return of more than 50% a year. At the same time, I bought Russian
oil company shares for my own account. I was underwater for a while but went
on to make several hundred percent in the next few years.
Today, the circumstances are very similar to those that I just described: With the
economic data pointing to better economic performance than anticipated, the
market has still cratered. At these low stock price levels, one must commit
capital.
As my colleague Alexander Green wrote superbly yesterday, quoting Warren
Buffett, “You want to be very fearful when others are greedy – and very greedy
when others are fearful.”
In this light, we want to make this market meltdown in financials an opportunity
to initiate our position by buying the Vanguard Financials ETF (AMEX:
VHF). The index’s top 10 holdings, which represent more than one-third of the
fund, include many companies that have suffered dramatic discounts and are in
the process of restructuring.
Company
Symbol
% of Assets
BANK OF AMERICA CP
BAC
6.98
JP MORGAN CHASE CO
JPM
5.99
CITIGROUP INC
C
4.59
AMER INTL GROUP INC
AIG
3.87
WELLS FARGO & CO NEW
WFC
3.85
GOLDMAN SACHS GRP
GS
2.46
US BANCORP
USB
2.32
WACHOVIA CP
WB
2.22
BANK OF NY MELLON CP
BK
1.97
AMER EXPRESS INC
AXP
1.91
But there is also tremendous value in other financials, like Lehman Brothers. To
give you an idea, if we assign zero value to Lehman Brothers’ intangibles and
goodwill, and we discount its holdings by 35% of book value, we get to the
current stock valuation. And Lehmans’ book value is not only a very sound
valuation – given the fact that Sabarnes Oxley has forced great transparency in
all these financials – but we know that the market values are representative of
where Lehman disposed $147 billion of these assets. So there is no doubt that
investors not only were willing, but they actually bought large chunks of all
sorts of assets from Lehman at those levels…
And today we are purchasing them at a 35% discount! A very similar situation
occurs with most financials, where the market is not only afraid of its own
shadow, but also caught in momentum selling.
So we are going to take advantage of this situation by buying the ETF, leaving
room to double (or even triple) our money invested, should financials weaken
further.
Recommendation:
Buy Vanguard Financials ETF (AMEX: VFH).
Enjoy and Profit,
Horacio Marquez
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