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Buying the financials while the Fed was aggressively cutting interest rates was supposed to be a no-brainer.
Banks, brokerages, insurance companies and other financial-related businesses rally in tandem to lower rates, which translates into cheap money for lending and investing.
A million and one professionals bought into this theme, and made the mistake of thinking the worst-case scenario for the credit markets was baked in back in June.
By mid-July, the bloodletting in the financial sector revealed giant writedowns being charged against earnings for huge exposure to subprime debt at the biggest banks and Wall Street firms. The rest is history, which is still being written to date.
Shares of Citigroup (NYSE: C) crashed from $25 to $3, Goldman Sachs (NYSE: GS) plunged from $180 to $47, and Bank of America (NYSE: BAC) fell from $40 to $10. You get the picture.
Even now with the Fed having taken the short-term interest rates down to a 0.25%, shares of financials stocks have only gotten a modest lift compared with where they were trading just six months ago.
This time around, history did not repeat itself.
All of those traders that were over-weighted on the long side in the financials got absolutely smoked. Even Warren Buffett fell victim to this trade. His preferred stock in Goldman is convertible into common stock at $115 per share.
Oops!
Bryan Perry is a contributor to OptionsZone.com.
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