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Financials and Oil - what's next for these sectors ?

I selected these two sectors for this post for one main reason - both sectors are at crossroads and most important sectors of the economy at least in 2008. Let's take a look at both of them at macro level:

Financials:
  • Consists of banks, mortgage companies, insurance companies, investment houses
  • Is down more than 50% - some of the stocks have been down more than 70% (check out ABK, MBI, LEH)
  • In recent weeks, stocks in this sector have bounced back - some of them have jumped nearly 500% from their lows (check out ABK, RDN)
  • No one is sure if we have seen the worst in this sector and hence don't know if we have reached bottom
Oil:
  • Consists of oil majors, oil servicing companies, natural gas companies
  • Only major sector which is still in positive column when almost all sectors are down by 10 or more %
  • Has come down by 25-30% from recent high
  • Oil has come down from 147 to 109 and going to $100
So where should one invest ? Here is my prediction and recommendation:
  • Financials have seen the bottom and even though there would be quite a few ups and downs, trend is upwards
  • Oil has come down in a major way and would still go down by another 10% or so before it stabilizes
  • My recommendation is to put about 75% of money in mutual funds targeted towards financials (BKPIX or UYG, FIDSX) and 25 % in oil related mutual funds/ETF (FSESX, UNG). IMO, this split should return about 15-20% over next 12-18 months and beat S&P handily
  • If you are risk-taker, check my previous post on mortgage insurers but invest when these stocks come down a little (towards my recommended prices). LEH stock should be interesting this week - at $15-16, I would recommend it for potential return of 25-30% in next 12 months
Let me go and get my RNC analysis from Jon Stewart !

Good luck and good night!

/Shyam

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