Market Alert! 2008-10-10

OK, it is a good thing I recommended taking money off the KBE last week. Over the past two months I have removed over 50% of my money out of the KBE, which tracks the banking index.  Since I posted my 9/29/2008 Market Alert! titled I just sold some KBE, I the banking index fund has lost 30% as of this morning's pre-market trading price.

The reason I have changed my stance on banks is because it is apparent now that more that just a handful have major problems. And even scarier is the fact that President Bush is likely going to announce at 10:25am this morning that the federal government will begin to take equity stakes in the banks in an effort to further inject liquidity into our broken financial system. This means that the banks will be issuing new stock shares, which will dilute shareholder earnings. This is not good for bank stocks, which is likely the reason they are down more than 10% in the pre-market trading this morning.

I am sorry, if the U.S. government is going to change the rules of the market as they have unrentlessly done for weeks now, it is impossible for me to make a reasonable market assessment with regard to the banks. And since the banks this morning are now trading below their 7/15/2008 low, that tells me that there is a very good chance that the banks will not hold at this support. If support doesn't hold, we will likely not bottom until we wipe out at least 80% of the value of the bank stocks from there peak in 2007. This is case in point as to why, as an investor, you have to take risks in order to make money in the long run. But when the rules of the game change or things become clear that they are not going to work out as previously thought, you also have to be willing to cut your losses and find another opportunity elsewhere. Having said that, I do still have some exposure to KBE...just much less so they I did several months ago. At this point I don't plan to sell anymore of my KBE position; instead, I will just wait for banks to recover. And I am a patient man!

Gregory