Washed Out Sectors....

If this indeed a bounce that lasts more than a few hours I would not be surprised to see the sectors totally terrorized take the lead... financials, restaurants, retailers, and even (yes) homebuilders.

If you are an active trader these are areas you might want to play in; not suitable for what this fund is based on, but just wanted to mention that. Also I will say when they do bounce you will hear (YET AGAIN) this is the bottom, smart money is buying financials - therefore they have bottomed (they said that about 15-20% higher a few weeks ago), the Fed fund cuts coming means this is the bottom (they said that about 15-205% higher a few weeks ago), homebuilders will bounce from spring sales, blah blah blah, etc. Don't buy any of it. If you are trading these names, treat them like the trades they are. Myself, I have cut back my short exposure (through the Ultrashorts) for now as these areas are just despised. I am not sure if they can even go lower without the End of Days approaching. :) I plan to let hope come back to these sectors and then if we get a nice bounce, re-apply my Ultrashorts down the road in larger scale.

If I had to buy any of these groups I'd actually poke around a few retail names such as Under Armour (UA)... Costco (COST) etc. The homebuilders are in a long term secular death spiral and a few need to go out of business by the end of this year. The restaurants are locked in between twin trouble of rising food inflation (killing their costs) and a slowing consumer. I talked about this in September, but the 'savvy experts' are now just realizing the reality. The banks, while eventually being helpd by lower interest rates, are still not fully disclosing their issues and worse - their balance sheets will erode further as consumers start defaulting more on credit cards, personal loans, auto loans, student loans, and higher quality mortgages (alt A, prime, etc) over the coming year(s).

On the other hand while I do expect retail to slow down people are not going to stop shopping - just ratchet down from where it has been for the past few years. Electronic gadgets, "cool teenage stuff", Costco warehouse items, will still do good enough. So unlike the areas above, I see some light there, especially at these valuations. But more for short term opportunities. As unemployment ratchets up, these stocks will continue falling after some bounces along the way.

Also as I stated in my 13 Outlier Predictions for 2008, I do think the investment banks will in fact be a good investment in the latter half of the year - unlike the traditional banks who hold all this junk on their books, the investment banks are more like 'enablers' - they did hold some of this junk in their trading desks but as they write down quarter after quarter, the value will eventually be marked down appropriately and then they are good to go - no real exposure to the consumer. That said, part of their businesses are gone forever (or if not forever, until the next time the Fed cuts rates to 1% and hedge funds decide buying mortages is a great thing), but they are the middle men of all the world's major financial transactions and M&A activity will continue, foreign cash rich companies will continue to buy up assets of our subprime nation, new IPOs will continue to be brought to market, all good and lucrative things. Aside from Bear Stearns (BSC), the other 4 investment banks will come out of this fine in the end. While the group is due for a bounce soon enough, I do expect some more pain in the first half of the year, but unlike the money center banks, I do expect the back half of the year to be quite fruitful for some of these players.... I do think it is useless to lump all financials together as good or bad, just as people do with tech - a semiconductor company is not a consumer gadget company just like an asset manager is not an investment bank is not a money center bank. Opportunities will abound over time, if you pick the right slice of each sector.

p.s. Speaking of my 13 Outlier Predictions, I want to rescind my guess that Hillary wins the Democratic nomination - she is falling much farther than I anticipated and Obama seems to be the man. Already. After he wins New Hampshire, he will win South Carolina and then it's over. I still think the McCain / Huckabee case plays out although Obama is drawing away the Independents in New Hampshire as his vortex of love is running so hot right now. But I want to remind readers I have been saying for months that Iraq will fall to the wayside and the economy will be the #1, #2, and #3 issue. I find no Republicans other than Huckabee talking about the economy and I think this is why he has a real chance. He sounds like John Edwards out there.... I really think in their cocoon in Washington and NYC these political strategists have no idea how this issue should be discussed every day, all day if they want their candidate to connect. Interestingly I heard that neither Huckabee and Obama use the traditional political strategists and hence you see the results. Anyhow, I digress. ;)

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