Bear Gets Bullish on Bank Stocks

Bear Stearns’ upgrade of the financials to 'market weight' from 'underweight'  is based on several factors, including:

1) stock prices now reflect likely write-downs and weaker trend-line earnings

2) increased clarity surrounding write-downs

3) expectations beginning to reflect realistic outcomes

4) the recapitalization process is a positive sign.

That being said, Bear Stearns does not recommend an overweight position because they believe the credit environment continues to contain 'significant uncertainties'.

While I respect the opinions of the professionals at Bear, I am just not ready to jump into financials with both feet quite yet.  In particular, I am not sure that point #2 above highlighting “increased clarity” and the last paragraph highlighting “significant uncertainties” are not contradictory.

The following chart of the S&P 500 sector returns shows that investors have turned ultra-defensive.  This defensive positioning can be identified by the superior performance of the traditionally defensive utilities and materials sectors (Orange and Blue lines).   Where are you positioned right now?

Comments

[pickaroonwyo]

Like NY Mellon, Goldman and Blackrock in the financials (and GE indirectly). Any recommendations of solid companies which have been tarred with crowd but are waiting in the trenches to outperform?

[Reinko]

It is hard to imagine that the so called 'professionals' never look at the Federal Reserve flow of funds sheet.

If you do that you arrive at the conclusion that the entire US financial sector will try to pick up debt in 2008 in the order of magnitude of 2500 billion US$.

Don't believe me?

This is easy to proof:

Go to the Federal Reserve flow of funds sheet, here is the link:

federalreserve.gov/rel...

Go to the one before last column (total domestic financial sector debt) and scroll down until you get the last two numbers.
They say, total debt is

2007 Q2 = 14855.0
2007 Q3 = 15435.3 billions of US$.

Since 15435.3/14835 = 1.039 we have 3.9% Q on Q.

Thus a yearly estimate of 1.039^4 = 1.166 thus 16.6% Y on Y.

And 16.6% of the latest known 15435.3 billion is a rough 2500 billion US$.

Thus with letting this detail out Bear Stearns is just as crazy as that Chicago school of economists that are more an advertisement agency for the US economy.

No, the likelihood of a severe crash is climbing by the month and very likely it will start with a tidal wave of bankruptcies in the US financial sector. I mean: What can possibly stop this?

[thannagan]

Reinko is making a lot of assumptions based on 2 data points.