Musical chairs with the financials

When Warren speaks, the market listens.   That was evident Friday morning when Warren Buffet, the Oracle of Omaha, disclosed that he had increased stakes recently in one of either American Express (AXP) or Wells Fargo (WFC).   

The result was both stocks were up during the day and the financials, which are now in about Round 3 of their beat-down, got a slight reprieve.   Will it last? Doubtful.   

The housing crisis is still far from over, according to many experts, including Warren himself.   Banks are holding huge volumes of real estate that they have had to write down values on and can't sell due to a lack of qualified buyers or investors who are still waiting on the sidelines for prices to fall further. Litigation and finger-pointing still continues in connection with auction-rate securities, which were sold to thousands  of investors — including this one — as safe, secure, cash-like investments, when they were anything but.   

I'm just starting to get into Mohamed El-Erian's book "When Markets  Collide: Investment Strategies For the Age of Global Economic Change," but what I've learned so far about the risks that major banks took and the complicity of ratings agencies in making various types of securities and credit look better than they were, is staggering.   

The co-CEO and co-CIO of the Pimco bond firm also writes about cutting a vacation short in August of 2007 to reassess the cash position of the Harvard Endowment, which he ran at the time.   The worry was that even safe havens like money markets may not hold their $1 per share par value and "break the buck," which some did.   

Bottom line: There are probably more surprises to come. One such surprise, which preceded Friday's smiley face for financials, came from a former International Monetary Fund economist who predicted  that a major U.S. bank — as in one of the big boys — would fail in the next several months.   You know what they say about opinions, but that is one that probably shouldn't be ignored.   

That said, here's how I've been playing the financials: I took off half my position in the Financial Select Spider ETF (XLF) and entered equal positions in ProShares UltraShort Financials ETF (SKF) and ProShares UltraShort Real Estate ETF (SRS). I paid for those moves on Friday, after the Dow finished up nearly 200 points. I ended the day down better than 5 percent on each of the short ETFs, which go up in price when their sectors fall. 

But the Wall Street Journal reported that SKF was at the top of the list at midday for buying on weakness, meaning the largest inflow of money entered the ETF despite its price dropping. I still have long exposure through ETFs to the Dow, S&P 500, mid-caps and financials. I'm hoping that the shorts help hedge my portfolio for when the next shoe drops. 

But the real rationale behind this strategy is that I'm just plain confused.

Brian