The case for financials

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Posted by BrLee3 ( track member | ignore member ) - April 24, 10:52AM

SO as you all know I tend to write a bit different from the mainstream thought. This time however I am in agreement with most of the agressive long term money managers including Ken Heebner (CGM) and Warren Buffet (BRK.A). Both of these managers have entered into the markets in positions that would seem counter intuitive. I am here to make their case and try to explain why now would be a good time to get in especially if your horizon is longer than a year.
Number one. Buffet has moved into the bond insurance industry. This is a field that has been hammered by reports and investigations along with bad business decisions and Buffet has found arbitrage. What does this mean. Well if history is any indicator (and this should be taken with a grain of salt) Then Buffet is poised to make a bundle. He has invested where others fear to tread and when others run. This is also a man to capable of causing currency fluctuations in a single transaction (I am referring to when he closed the acquisition of an Israeli tractor/parts manufacturer and the shekel increased in value by .5% that day) so his move is definately a signal that things arent so bad. What also needs to be recognized is that he is no fool. Buffet does not put his money where it is not going to go to work. It is only there safe to assume that his increase in stake into Wells Fargo (WFC) and this foray into another aspect of insurance bodes well for the rest of us. I also am tempted to say that Buffet has lived through stuff like this before so he does have some experience in positioning himself for recovery.
Ken Heebner on the other hand is a focused value investor. He runs several funds that have done rather well in the recent years. His insights and strategies have yielded solid returns for his long term investors. I recently read a report that Heebner has decided to slowly forray back into financials to take advantage of high dividend yields amongst financial stocks. The idea being that despite downside risk the return from the dividends more than makes up for it. I happen to agree since a dividend is free money and adds value to your investment while you have to do absolutely nothing to receive it.
All in all I am here to say that those who keep saying that financials are a falling knife are looking to much to the downside. While yes there are still issues simmering under the surface It would seem that the worst is behind us for the most part. I happen to think that hedge funds are going to be the catalyst that puts the liquidity back into the market especially since they are able to buy up loans that have been so discounted that they are getting a ridiculous return rate and downside is almost nothing. I happen to also believe that a lot of liquidity missing from the capital markets is in hedge funds and in savings/moneymarket accounts where people are getting a better return than the indexes which should slowly start making a return to the markets as losses from the major financial institutions are less than anticipated and the banks are making major efforts to put more capital onto their balance sheets which would allow them to start lending again.

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