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Financial Bottom Prediction



February 14, 2008 – Comments (5)

The market has to go back to what makes a market health, and about 12% of the markets in the financial sector has historically been health.  I have buffalo dung in my yard and that's about what I think of all the arguments for "financial innovation" that some argue justify the change.

WSJ had this post: 

Near the end of 2007 it appeared that information technology would overtake financials as the largest of the 10 sectors represented in the Standard & Poor’s 500-stock index. But the wipeout in tech this year makes the downturn in banks look comforting, and it’s restored some of the earlier balance.

At the beginning of 2007, financials accounted for 22.27% of the S&P 500’s market value, with information technology in second, at 15.14%. By the end of the year, the gap had been narrowed — financials were 17.58%, while tech was 16.78%, thanks to a sharp drop in banks and steady gains in the tech giants.

So far in 2008, banks have continued to fall – but tech has declined further, as investors have reversed 2007’s stellar gains in big-cap names like Google, Research in Motion and Apple. As of Tuesday evening, financials accounted for 17.64% of the S&P 500, but information technology had declined to 15.46%.

With financial sector still making up 29% more than their historical norm, and the rest of the market facing a margin squeeze from increased input costs, well the financial sector has at minimum 29% further to fall, but likely more as there are declining profits in the rest of the market as well.  I think financials as a whole are probably still in the range of double their fair value.


5 Comments – Post Your Own

#1) On February 14, 2008 at 3:19 PM, floridabuilder2 (98.27) wrote:

i agree financials will continue to fall...  when financials start reporting earnings with no write downs then I am buying in a big way, but it ain't happening in 2008

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#2) On February 14, 2008 at 4:37 PM, AnomaLee (28.75) wrote:

"With financial sector still making up 29% more than their historical norm... well the financial sector has at minimum 29% further to fall"

I'm on board that there is more room for financials to fall/trail, but I don't want people reading this to be completley frightened. A 29% drop in weighting isn't the same as an actual 29+% correction in prices for all the stocks in the sector. Some companies will be affected more than others, and eventually some will delist and financials will correct to a lower sector weighting.

If you revert back 15 years you simply wouldn't find as many investment firms, REITs, closed-end funds, etc. on the S&P and DJIA. More of these investments are going to be taken private, become delisted, or become stock ghosts just as many already have.

The same correction in sector weighting occured to dot-com stocks after the tech crash... This should be to a far lesser extent since this bubble isn't based on securities in the stock market. 

Intriguing post as always...

Go dwot!

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#3) On February 14, 2008 at 5:51 PM, mickeyc21 (29.95) wrote:

All markets have a natural equilibrium. They can change somewhat over time but reversion to the mean is garuanteed.

The majority of people on this site (and in real life) have no idea what is coming. If you keep putting out good info it may save the odd person from making horrible investment choices.


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#4) On February 14, 2008 at 10:35 PM, floridabuilder2 (98.27) wrote:

mickeyc21.............  I agree that dwot puts out great info and it is info like this that made me love caps and the bearish people on caps that directed me to the very bearish blogosphere.. not that I was about to buy banks because I knew the rot there... but things like the bond insurers and what not.........

i agree that most people don't know what is coming, but neither do you or I............... that is why i invest based on what information comes in daily from the marketplace, how does the market react and how does the govt react...............  It is much easier to work in these daily timeframes than to try to predict how bad the economy will tank

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#5) On February 14, 2008 at 11:14 PM, dwot (29.30) wrote:

Anormalee, agree, stocks will adjust individually, but sector weighting will come down.

mickeyc21, I do fear that things will be much harder than people anticipate...  And I think belief systems are going to change...

FB, thanks...  There is so much about the markets that I do not understand, except that I don't like how it looks and the way it is unfolding is amazing to me. 

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