My Money Part II

As a follow-up on my earlier post I'd like to elaborate on these issues that give me a "gut" feeling bad things are coming. IMHO this will be true to the tune of apprx. 10%. Significantly:

"In Washington, Treasury Secretary Henry Paulson also spoke about the housing collapse but took a hard line against policy that could send the wrong message to risk-takers. Paulson said he had "no interest in bailing out lenders or property speculators."

It is a classic upside-downside analysis and, as we just discussed, the upside is non-existent. As for targeting the best possible sector for a short-sell opportunity we have identified two: Financials and Technology.

With regard to the financials sector I came across this interesting analysis of the $100 billion bailout Superfund:

"The subprime borrower who can't pay his mortgage today won't be any better equipped to do so after this bailout. All that may be accomplished here is for lenders to delay the recognition of these losses"

This is in line with my reasoning. Simply put, the buck will stop somewhere (consumers) and when it does, the rest of the economy will follow. After all, we're at three bailouts (Fed rates cut, Fed market infusion and the aforementioned Superfund) in the last two months. How may more do we need to signal the precarious nature of the latest market recovery?? Then there's still all those nasty little issues like oil, gold, inflation, real estate '08 election ect.

The technology play is more a step back from the obvious financials play. The thinking here is that the sector has been a haven from the pain of the financial/manufacturing market. As a result, the sector has enjoyed a nice run, right? Well, this doesn't bear out necessarily. Check out this chart I designed that contains a comparison between financials (XLF) Tech (QQQQ, XLK) and the S&P.



They appear strongly correlated. So is the technology safe haven a figmant of my imagination. Not sure, a quick search of the performance of leading ETF's in the respective sectors shows financial ETF's under water across the board in the last 1 and 3 months, versus tech ETF logging strong gains across the board. What gives? It may be something obvious but I don't see a good explanation just yet. Do you? Will tech be hit when: the consumer market shows its hand later this holiday season and, when companies, due to the credit tightening and economic uncertainty do not finance long term projects or make significant capital investments?



More to come.