Today I want to review a few positions in the portfolio and continue our endless pursuit of maximizing our long-term upside while minimizing our long-term risk through active portfolio management.
I entered Baidu back in July as a technology platform play that doubled as exposure to China. It’s a rare time that I invest in a foreign-based entity, as it’s hard enough to find and understand and believe in US-based companies and foreign stock markest are rife with fraud and scams. Baidu rallied a bit afterward, but has been a loser since then as China’s stock market has struggled and as competition in China search heats up. I still think Baidu is probably the best technology play for China, but I’m going to cut my losses and get back to focusing on safer, US-based companies and investments.
On the other hand, we’ve finally started to see some new cracks in the banking industry and their stocks got pummeled in Monday’s stock market reversal. I’ve been seeing similar charts throughout the blogosphere and occasionally in the mainstream media about how bank earnings are at historical unheard-of heights as a proportion of our economy’s overall GDP.
That chart is from 2007 and the more recent ones have that hockey stick effect going straight up to the right. More to the point, the stock market itself seems to have run way far ahead of even that hockey stick of earnings chart. Goldman Sachs, here at historically unheard-of peak earnings, is, through all the endless subsidies is gets, going to “earn” maybe $7 billion this year, and the market is valuing its equity at more $70 billion. JPMorgan is going to work its subsidies and government handouts to the tune of “earning” some $18 billion this year or so, here at these outsized peak earnings, and the stock market value is about $180 billion.
I’ve been slowly but surely trying to get short these financials and last week I added to Goldman puts and added to my existing MS puts in my own portfolio. Those puts are up big as a result of Monday’s market crash and I think we might finally be embarking on an historical reversal to the banking industry’s profitability profile.
Gold, meanwhile, is looking like it might be trying to bottom here since I suggested starting to scale into the physical commodity itself in last week’s newsletter. And with the Italy/Euro-crisis heating up, along with our own endless Republican/Democrat fake game of chicken, there’s a lot of potential catalysts for a big move in both gold and our aforementioned banks.
