Credo Investment Club Blog: I am not bottom fishing (on the financials).

For the first time in five years, the financials are lagging the broad market indices.

The sub-prime mortgage virus has successfully spread itself to the entire financial system. Any financial intermediaries are feeling the pinch. However you want to be known to the outside world (investment bank, commercial bank, specialty finance company, mortgage lender, or all of the above), you did not escaped the effect of the recession in the housing market. The business of borrowing money short term (and cheap) and lending it long term (at a higher rate) has been very lucrative in the past few years, thanks to the low Fed Funds Rate and a robust housing market.

The party has come to an end as the Fed started to move interest rate back up and as the housing market went down the drain. And most banks are just feeling the pinch now as they are stuck with packages (ABS, CDO) that nobody wants. Each of these financials have recently written down billions dollar of value.

Dude, where’s my value?Source: Seekingalpha.com

The question is, are we done writing down?

Many of us want to believe that this is the last of it. The fact is, I simply don’t know what methods these guys used to write down their books. Which one of these guys are more conservative in their approach? Which one of them are stuck with a lot of bad loans (leveraged buyout loans/mortgage related CDOs)?

Until I get a better picture of these write downs, I’m in the same trench as Michael Mayo, the DB analyst who believed that this isn’t the last of it. (http://www.bloomberg.com/apps/news?pid=20601087&sid=ajoV.anbChd4&refer=home)

I refuse to go bottom fishing in the financials. I can vividly remember the recent turmoil in the housing market and how optimistic we were to believe that the housing market would bottom in 2007, or was it 2008, perhaps 2009 and beyond? The risk in buying these stocks remains high in my case since I don’t really know how to look at the financial companies nor do I have any experience in it. Investors tend to be overly optimistic in the beginning of every bubble burst. I am staying away from the financials for the time being. And not to mention a recent interview Jim Roger did with Bloomberg. He mentioned that there are "level 3" assets that have yet to surface on the books of these banks and brokers. And he is currently shorting the investment banks. I'm going to do my research on these "level 3" assets and in the meantime I'm going to sit tight on the next roller coaster ride.

All banks are not created equal: