We're already profiting from financials, and more picks are poised for take-off

July 25, 2008

The Shadow Stock Trader
Friday, July 25, 2008
By Horacio Marquez

Email – #7

** We’re already profiting from financials, and more picks are poised for take-off

Our decision to buy when everybody was panicking is already paying off. That’s right, we are actually making money in financials despite mammoth volatility.

When you buy something cheap, it can always get irrationally cheaper. After all, almost 100 years ago Lord Maynard Keynes said that “the market can remain irrational for longer than you can remain solvent.” But, that was the time of the bear raids without the uptick rule and before naked short prohibitions, I add, somewhat sarcastically.

Let me clarify. Those problems were what propelled financials to levels well below their theoretical fundamental valuations! Enter Christopher Cox from the SEC, who enforced and extended the naked short rules… just as financials were terribly oversold and naked shorts abounded. Still, he refrained from reinstating the uptick rule, which was curiously removed last year. Hmm…

At the same time, almost all the major banks beat earnings estimates handily with much smaller charge-offs and no need to raise additional capital. Mr. Cox has also stepped up his insider trading prosecution efforts and is seeking to convict the originators of malicious rumors about possible failures of financial institutions. It won’t be pretty.

To cap it off, the U.S. Congress is set to work this Saturday (our “hard”-working lawmakers are at their vote-capturing best!) in passing the housing bill that President Bush reluctantly agreed to sign. It’s a very imperfect law, which rewards irresponsible lenders and borrowers and provides for strong backstops for the U.S. Treasury to ensure that Fannie and Freddie remain well capitalized and do not further disrupt the financial markets. This, while not perfect by any means, will limit the extent of future home price drops and thus help not only these irresponsible borrowers and lenders, but also the banking system’s capitalization and the economy and market as a whole.

So despite yesterday’s profit-taking, you should expect more upside in financials, even in the short term. And obviously, expect a major multi-bagger in our Vanguard Financials ETF (VFH) in a year or two at most. Remember that in the much deeper S&L crisis, banks started rallying when there were still some 50% of the bank failures ahead of them! That’s pretty much the only argument left in the bears’ arsenal.

Plus, oil is collapsing, which will help inflation, consumer purchasing power and confidence and the entire economy and markets.

With respect to emerging markets, and our Emerging Markets Index ETF (EEM) which saw a 3 – to-1 stock split on Thursday, Jeff Immelt, President and CEO of GE, which has massive overseas businesses, declared this week that he sees no deceleration in the emerging market infrastructure build-up. And with oil dropping, India, South Korea and Japan, which are heavily dependent on imported oil, should benefit handily.

Finally, Australia got hit last night as National Bank of Australia took an A$850 million write-off for a structured product valuation adjustment. Australia is heavy on banks, minerals, some energy and even agriculture, which have seen prices drop. However, Australia is very tight in its monetary policy and can drop rates a lot from the current mammoth 7.25% that the Reserve Bank of Australia set for minimum rates, since inflation is already abating. Similar cases are Brazil and Russia. India and China are getting closer, especially as oil comes off, and they can always allow their currencies to appreciate faster. So the BRIC and emerging market story remains pretty intact and ready to reaccelerate fast and soon. I remain very confident in our iShares MSCI Australia Index (EWA).

I am getting closer to pulling the trigger on our next sector: We have seen some very attractive former winners being sold off heavily recently, and I am busy looking at valuations, technicals and that next catalyst. So stay closely tuned early next week. Have a great weekend!

Enjoy and Profit,

Horacio Marquez

All Shadow StockTrader recommendations will be posted on the Monument Street Publishing website. Simply go to http://www.monumentstreetpublishing.com and click on “Money Shadow Stock Trader.”

Stock

Current Price

Comments

iShares MSCI Emerging Markets Index (EEM)
$42.59
Buy. Stock Split
3:1 on 7/24/2008

Vanguard Financials ETF (VFH)
$39.32
Buy

iShares MSCI Australia Index (EWA)
$25.70
Buy

All Money Shadow Stock Trader recommendations are posted on The Monument Street Publishing website – www.MonumentStreetpublishing.com Just click on ‘The Money Shadow Stock Trader’

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