Yesterday, financial stocks were hit pretty hard. 

While a couple of high profile and perhaps well timed analyst downgrades of Goldman Sachs and the announcement of first time loan losses from JP Morgan didn’t help matters, it is perhaps more interesting to note that the sell off coincided with the expiration of emergency SEC rules banning short sales in a select group of nineteen financial stocks.  For perspective, these stocks rallied as a group nearly 35% since the rules were put into place about a month ago.  As we wrote in an earlier update, we encouraged investors who had done well in bank stocks to mark their calendars on August 12th to see if the recent gains would hold.

Nothing much is new in the markets or the economy for that matter, with the exception of the crack in oil prices.  We are in a slow growth economy and expect that it could be this way for as far as the eyes can see.  In such an environment, those that can grow at superior rates are likely to be rewarded over time, as are the occasional tradeable sectors that are out of favor, under owned, and and currently oversold.   

We would still be very careful with the financial stocks and only be buyers – and even timid ones at that – when the stocks are clearly on sale and approaching their technical lows reached a month or so ago.  It takes a long time to work through the aftermath of a popped bubble; even now technology stocks remain off their highs reached in 2001 in spite of some significant bear rallies along the way — including one massive one in 2003.  The point isn’t that you can’t make money in these stocks, it’s just that we’d be very careful chasing them after they’ve enjoyed a very nice bounce.

Oil’s decline of over 20% to $113 is clearly new news in this market and a subject worth following.   As we have stated many times over the past few months, we believed that the year to date run in oil was more reflective of speculation than anything else, driven onward and upward by what we’ve called “fund flows gone wild”. 

On our last CNBC appearance in early June, we stated our case that declining growth rates in overseas economies might be responsible for an eventual pullback in oil prices.  Clearly, the markets have started to catch wind of this argument, with more and more folks discussing demand destruction.  This morning we also read that T Boone Pickens hedge fund – a man whose character we highly admire — was off 35% in July alone.   

With oil now at $113, the argument for even lower prices isn’t as easy to make.  Related industrial energy plays have reported very strong earnings reports and guidance in recent days, but the stocks have been hit hard over concerns that margins may be peaking and that a derivative action in such stocks based on the movement in oil prices may now be over.   This is why we encouraged investors to not only look at their energy holdings, but also more clearly understand the places in their portfolio that are exposed to oil, but not in such obvious ways.  Harkening back to the gold miner arguments of technology’s halcyon days, if the gold miners catch cold, those who sell them their pick axes and shovels will eventually be hit as well.  

We will be on CNBC Monday morning, August 18th at 9:35 am and hope to provide our updated thoughts on the markets and our portfolio at that time.  Please plan to mark your calendars and tune in if you’re able!