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Financials Hit Key Level

Over the past 18 months, whenever someone has asked me about the financials and when it might be time to buy, I’ve told them that when the leaders hit 80% to 90% of book value, then that is the time to start building positions.

In past bear markets that have been led by the financials, they ( those with strong balance sheets and earnings ) have historically bottomed when they hit the 80% to 90% of book value level.

Goldmans Sachs is trading at 90% of book value.

Morgan Stanley is trading at 60% of book value.

We are in a historic period where the short sellers in the hedge funds are doing the best to drive down the share price of these companies so that they can flip their positions, buy shares into a long position, and see significant gains over coming months as share prices return to historic price-to-book ratios. Now, this only really works on the solid companies with strong balance sheets and earnings – both Goldman and Morgan Stanley reported earnings this week and confirmed their balance sheet strength and earnings above analyst estimates.

We’ve started to build positions in these two financial as the bear market raids have been playing out, along with Northern Trust and Annaly Mortgage. These positions will be volatile for the near-term, but with a two year perspective they should provide strong gains for client portfolios based upon past bear markets led by financials.

Mark