FOR THE FIRST TIME IN OVER 2 MONTHS…..
I've taken on long side exposure relating the US equity markets. I initiated a position in FAS on Friday at roughly 10.50. It's the smallest position in the portfolio for the time being. I may add in the near future. Depends on what I see, hear and smell in the coming days and weeks.
In my article from 9-22 entitled "Black Clouds and Traumatic Memories", I briefly discussed a discounting mechanism that I believe is apparent in the marketplace currently and is receiving very little mention.
The traumatic events of 2008 undoubtedly left lasting mental scars amongst the majority of professional investors that currently dominate Wall Street. The relatively short amount of time between the 2008 crisis and the current crisis - not to mention the similarities - are causing investors to face the same fears as they did in 2008.
Given the flashbacks and propensity for survival amongst those who are making vast sums of money, you can be assured that fund managers are taking every step necessary to make sure that they don't lose a source of income that will be impossible to replicate should the market repeat the events of a few years ago.
In other words, risk has been taken off completely and totally in the name of job security. Given this set of circumstances how much of a repeat of 2008 fear discount is being factored into the markets currently? Even more importantly, how much of a repeat of 2008 fear discount is being factored into the financial sector currently?
After all, the financial sector is what was behind the events of 2008. The financial sector caused massive wealth destruction amongst those who thought that Lehman and Bear going down was an impossibility. The financial sector became the poster child for over-leveraging and lack of oversight or perhaps lack of understanding with respect to fundamental truths about markets.
There is no sector that is as negatively influenced by this discount as the financials. With that said, the greatest potential for mispricing and therefore, most significant upside is in the financial sector.
You can study the balance sheets of JP Morgan (good luck with that if you try, by the way), Goldman, Bank of America and Citi until your eyes falls out and bounce around your desk. It's not going to take into account the core reasoning behind all price movement: Emotionally driven aspects of human psychology that depend on monetary fulfillment in order to derive a sense of security to further cultivate the fundamental motivation behind all living things - procreation. A subject for another article.
Once fear gives way to rationality, it will become apparent to investors that the discount being assigned to the companies that deal purely in the various aspects of money is currently being overdone as a result of previous experiences and a cycle of headline boogeymen.
And that is my motivation behind initiating a long US equity position for the first time in over 2 months in the financial sector.
