If you’ve been in an igloo for the past 12 months, I’ll understand that you don’t know what I’m talking about, but if not, no excuse. The past few months have seen major write-offs by the biggest banks in the world, usually American ones. The problem that was going on was mainly caused by asset backed securities. What are they? It’s basically a structured security that is a loan but with a guarantee. Say what? Ok, so you all know what a mortgage is right? Imagine that the bank that gives you your mortgage actually sells its obligation (the loan) and rights (to your payments but also to your house if you do not pay). And let’s say instead of selling your mortgage, they sell 1000 of them at once. Now we’re talking right?
See the problem yet? If the Bank is getting paid for each mortgage that they sell (a spread), what incentive do they have to make sure you can repay your loan? None basically. And why should they worry, they were reselling the loans to investors around the world who had no idea what was behind the loans (a 500K mortgage given to a couple that makes a combined 50K salary..). So anyway, the whole story now is that after the major writedowns of the past few months (and even this week Wachovia Bank (WB) made a 9 billion writeoff), many analysts now think the worse is past us and that it’s time to buy the financials.
No doubt, after months of very tough times, the past week has been the past in a long time for financial stocks in a very long time. And with a lot of stocks having lost up to 70% of their value, they still have a long way to go if you think the crisis is over. I thought about different ways to play this, perhaps buying Citigroup(C) but decided to buy an ETF instead. First I was going to buy XLF (Financials ETF) but eventually changed my mind and bought UYG (Ultra Financials Pro Shares), an ETF that replicates two times the performance of the financial sector. Risky? Hell yes. But I’m taking a risk on this one… I made my buy at 21.25 so we’ll see how it goes. Right now I’m thinking I’d get out once my money is doubled, we’ll see, that could change as my opinion of the markets changes. See the 1Y graph below… has a lot to catch up hey?
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