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Minyan Mailbag: Risks in the Financials

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The rally might last for a while but risks, when they manifest, will be painful and profound.

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Todd-O,

I've been a fan for a long time and appreciate your "angle" very much. Keep up the good work. It is both insightful and inspiring which, in my book, is a great combo.

I have to bust your chops on one thing: You waxed yesterday, "how good would the Yanks be with healthy pitching and a solid bullpen?" Heck, even the Cubs (Chubs) would be good with that!! However, the real answer to your question is the best team in baseball with that lethal combo would be the Detroit Tigers! Wow, can they hit. My guess is they work their way into the Fall Classic somehow. The secret weapon is Jimmy Leyland!

Finally, I've been overweight the brokers (both Merrill (MER) and Morgan Stanley (MS)) for some time. They do feel heavy here. Given your experience, what needs to happen for these to move to new highs. Maybe we need rates to move down? Maybe we simply need to get through summer? While they feel "tired" they are still printing money and "feel" relatively cheap as well. Thoughts, feelings??? Have I bumped my melon on this?

All the best to you and yours. Keep up the inspiring work. I hope you know how many appreciate it!

Respectfully,
Minyan Richard



Minyan Richard,

A few thoughts, in no particular order.

First, point taken. If the Raiders had a good D and strong running game, they wouldn't be one of the worst squads in football. I like the Tigers' game and already find myself tracking them as they battle the Yanks for the wild-card spot (yes, it's early).

Second, and consistent to what I wrote last week, there are reasons to like these names which are, by extension, the same reason to like the market (the brokers are the truest encapsulation of our financed based economy). That, as much as anything else, is why I don't believe in an overweight posture in the group. The market, as a whole, is very dependent on rates and access to cheap capital.

Now, in the interest of being forthright, my caution in this space is undoubtedly the worst call of my career (and that's saying something!). Still, my sense is that I'm more likely early than wrong, which is a two-sided sword. The rally might last for a while but risks, when they manifest, will be painful and profound.

Minyanville's mission is to provoke, rather than shape, thought so take these vibes with a grain of salt and a shake of pepper. I would simply suggest defining risk, when possible, and remaining conscious of the ever-changing landscape. Warren Buffett once said that investors should be fearful when others are greedy and greedy when others are fearful.

With the financials comprising over 20% of the S&P--not including multinationals with large finance-based operations--I would argue that this group is much loved and well owned. That doesn't mean they can't continue to juice higher, it simply means that alotta folks are betting they will.

Many thanks for the kind snaps and good luck!

--Toddo

R.P.
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