Fundamental Trading Diary

Fundamental analysis of the capital markets

Top-Down Analysis

My bull call had me purchase a mini Dow contract at 11,093.  Though under water for most of the week, it’s sitting at 11,147 with a very modest profit of $270.  Further analysis

Quantitative Top-Down Analysis

The market has definitely partially priced in the buy-outs.  A quick look at the P/E ratios of some key sectors (from Yahoo Finance):

Basic Materials 17.69
Technology 20.34
Industrial Goods 22.38


We’re going to deliberately ignore the financials’ P/E right now – their current earnings are virtually meaningless looking forward.  What we do know is that they will be able to sell off 750B worth of assets at higher valuations than the open market. The investment bank which probably stands to gain in all of this is Goldman Sachs. This massive buy-out is being almost entirely organised by ex-Goldman chiefs, and you can bet that Goldman Sachs is now in a position to effectively conduct arbitrage between the current debt market and the new 750B buying spree. They’re particularly in a good position to benefit, having the lowest exposure and leverage to the CDOs out of all of the big banks.  The GS stock price over the next 3 months will double as the corruption index.

Basic Materials

This industry is worth over 5 trillion.  Roughly 4 trillion of that is oil & gas.  The remaining trillion — precious metals, industrial metals, chemicals and minerals should do pretty well.  Oil and gas will not.  The basic materials sector should be poised to get some gains


Technology is pretty ordinarily priced – if somewhat optimistic that they’ll be able to maintain earnings.  The business behind the technology sector is far too varied and specific to facilitate broad quantitative analysis.  Technology can be put in place to save money just as often as technology investments can be made into vapour-ware.  Technology does generally benefit from liquid borrowing conditions (it’s expensive to do research and bring technology to the market), and can be used to bridge problems in any context.  The buy-outs will benefit technology by proxy.

Industrial Goods

A continuing weak dollar should help the exporters out of this list.  After the government subsidies to the automotive sector, can it really get worse?

With this analysis in mind, I will re-iterate my modestly bullish stance into October, and will keep my mini Dow position open.  If I traded SSFs, I’d be buying Goldman Sachs – this 137.99 level will be a bargain with all of the pure arbitrage profit they’ll be ringing up.

Update 09/29/08 11:34 AM: Looks like my timing was terrible for a Goldman Sachs buy.  Good thing I wasn’t trading SSFs. 🙂  I’ve picked up one more Dow contract at 10,858.


September 27, 2008 - Posted by | Uncategorized

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