Weekly Wrap-Up – Sector and ETF Overview

Was that a good week or not?  Let's look at some sector ETFs to find out:

We ended pretty much flat for the week across the board with 10% gains in financials leading the way, coming back from a 15% drop between Monday and mid-day Thursday.  The financial sector is back to where it was just before the big breakdown in June and having the XLFs hold $22 will be critical next week.  AIG was 7% of the XLFs holdings at one point, C is another major component and the ETF had stock in FRE, FNM, LEH and others.  We have to wonder, with the latter group already near zero, will the upside now be larger for the remaining components?

The energy sector added near 10% but the XLE is nowhere near June's $87 level at $71.25.  Consumer cyclicals (XLY) went nowhere for the week or the quarter despite better than 10% gains in the XHB.  Technology (XLK) did not budge and is more than 15% below June levels but Health Care (XLV) is still in recovery mode, up 5% from June although down for the week.

Like Energy, Materials (XLB) got a nice 10% pop off the government's largess but, at 38.28, it's a long road back to $44 from late June.  Industrials (XLI) jumped up on Friday's open and then thought better of it, finishing almost flat for the week.  The XLIs were up at $40 in mid-May, now $33, down less than 20% if they can hold onto it, something that did not look likely at all on Thursday.   The same can be said of the XLU (Utilities), who were full of sound and fury but signified nothing.

Rounding out our 10 major index funds, Consumer Staples (XLP) and Telecom (TTH) both had disappointing weeks with the XLP shaking off a massive spike on Friday morning to finish down for the day but UP for the quarter and TTH winding up about flat for the week and just under 10% down so far this quarter.

Not exactly an awe-inspiring group is it?  And that's WITH $1.3Tn in government aid, I'd hate to see them under harsher circumstances.  We need to give things more than a day to get moving, of course and the bulk of the government's commitment was not really detailed until Saturday morning but the word was certainly out and I'm not sure that it's not too, little too late because intervention is, as Capital Speculator says: "an art, not a science."

It was too little, too late for West Virginia's Ameribank, who were shut down on Saturday after surviving 102 years and ABK may be gone next week if they are downgraded but that is probably nothing compared to what could have happened if Thursday's run on the money markets would have continued.  As of Thursday, $144Bn out of $3.4Tn (4%+) had been withdrawn vs. just $7.1Bn the week before forcing the Fed to "lend" out $230Bn against illiquid asset-backed holding held by the funds.

That's how close we were to a meltdown folks, another day like Thursday would have been $50Bn more than the Fed ponied up to cover.  Roger Ehrenberg does a good job addressing the "moral hazard" issue from a fund manager's perspective yet I'm hard-pressed to see what the alternative to Socialism was going to be after the administration fumbled the ball for so long that the whole game was on the line. 

I discussed the "hail Mary" nature of the government's action in yesterday's post and and the ball is very much still up in the air and this could go either way.  This week, we'll take a look at some defensive plays in gold stocks and even ETF shorts (if we are allowed to buy them).  Now more than ever, a put may be your best friend. 

It's almost pointless to review the week as there has never been a more blatant case of market manipulation than we had on Thursday and Friday of this week.  Just because the manipulation is in your favor, doesn't mean it's a good thing and we have to watch out for this now massive house of cards as the government tries to prop things up one plan at a time. 

Monday morning we were looking at the protection of the SKF Jan $140s (ultra-short financials), the Russsell Oct $700 puts and GLD Jan $77s.  Monday night I mentioned SU looked primed for a spill due to some unfavorable news and we were right on top of the SEC regulatory changes for short selling, which turned out to be the story of the week.  Tuesday I presented my own "$70Bn Housing Solution" which suddenly seems cheap in light of the week's events and we expected a bad open but we did hold our 25% levels and just a shred of hope.

Tuesday night was no celebration however as I said: "So, if our indexes can keep it together above the 25% line then we can keep looking for some sort of recovery but, if we blow those levels and smash through that 61.8% Fibonacci level (down 38.1%) while the rest of the world fails to recover, then this is going to turn into an economic death watch, let’s all pray that’s not the case…" 

Wednesday morning, Lloyds saved HBOS and the Fed saved AIG and we were not very enthusiastic because clearly there were more fires starting than being put out.  A very strong VIX move higher cheered us up during the day and that night I pointed out a couple of nice dividend-paying plays that were good candidates for getting through a rough patch.  I did not know how right I was in my final comment on Wednesday when I said "even cash isn't safe" as the next day the money markets were only paying 97 cents on the dollar and there were cases in which treasury buyers paid the government to hold their cash.

Thursday morning I noted that the headline hysteria was running headlong into Federal action.  I wasn't sure we were there yet but playing the FXP (ultra-short on the FXI) Oct $120 puts that morning was certainly the best speculative idea of the week as that ETF went from $140 to $80 over the next 2 days.  I was still overall cautious in the morning as Fed liquidity alone was not going to cut it but, as the day wore on and the rules changed – it became a no-brainer to turn long during our intra-day chat.  We detailed that discussion in Thursday's wrap-up so I won't get into it again. 

Friday was just plain sad for the bears and they were screwed over by the government and have every right to complain.  Still, it's hard to say it's a good idea to bet the government WON'T do anything and will let the markets fall lower than 25% down without a fight – that too defies logic.  Keep in mind that China tried stuff too, as did Japan and to no avail. 

It remains to be seen if we get follow-through in the markets next week but, as it's the end of the quarter, if we don't get it by Friday I'm not sure that we will as a lot of hedge fund redemptions may come in if investors feel that $1.3Tn is not enough Government aid to turn the markets.