XLF and XHB

As the financial markets melted down around the globe and some long heralded names of Wall Street came under attack and crumbled, we have watched some very familiar cycles unfold.

Back in Q3 of 2007 when we saw Fremont General FMTQ.PK, New Century Financial NEWC.PK, etc. start to fall apart, the market pundits assured, they said "the subprime issues are contained to a few of these niche mortgage companies" and we all took in a sigh of relief. Many promptly sold, the shorts continued their profitable barrage and we started to look ahead to a world with prime only paper being issued. Investors (using this term liberally) piled into Countrywide Financial CFC, saying that Countrywide at $20/share was the deal of a lifetime. Then it went down to $15 and many doubled down, again citing that "somebody needs to write all of these mortgages" and it continued down, and down, and we all know where that went.

It is interesting to look at the psychology behind this.

Countrywide never had to take chances. They had a literal straglehold on the A paper market. They were all set. The greed that overtook them and led them into the path of subprime destruction is the same path that many investors went down, myself to a certain degree.

Whether you are an investor, a CFO or a CEO, the lure of an asset that is discounted 50% or more is sometimes too good to pass up. That is what has happened to much of corporate America. Top executives play with their investors cash, building huge legacies, etc. not taking into account the worst case scenario.

This mentality, coupled with some of the shocking collapses that gripped the market news over the past two quarters has changed the financial landscape forever. Hopefully capitulation is finally setting in and the horrible selling has already taken place.

My point? I have a thirst for value. Mainly low PE's and a good dividend. The upside? There are many individual stocks out there that are currently very attractive given their valuations. However, how do we know which ones are safe? Financial stocks are not like retailers. We cannot see if same store sales drop, etc. The disasters in finance are ignored or hidden until they are the icebergs that sink Titanics.

My point part two. The only way that I am playing this mayhem, and this is simply my ramblings - DO NOT EVER TAKE TIPS ON FINANCE AND STOCKS FROM THE INTERNET - EVER! anyhow, my point is that I want to be in the finance stocks. BAC, JPM, C, AXP are all great plays in my opinion. However, I cannot risk another collapse.

My point part three. I am buying the XLF and XHB.

The XLF (financial sector spyder) and the XHB (tied to the homebuilders sector) are all hammered down, pay a good dividend and allow you to play in the arenas that will hopefully not go away.

This is a great way to take in the upside while greatly hedging against another wipeout. As rates get more attractive and companies and individuals start saving, spending, buying homes, etc. thse indexes should come back strongly.

Options activity suggests that this is already taking place in the XHB.

Anyhow, this is a great way to take advantage of the upside while protecting yourself against the downside.

Good luck,

Mr. Boo 1031