Excerpt from Raymond James strategist Jeffrey Saut's latest essay:
.. [Currently] the media is replete with the question, “Is now the time to buy financial stocks?” Indeed, I did a number of media appearances last week and the question du jour was, “Do we buy Citigroup (NYSE:C) on today’s awful earnings report?” Our answer was that focusing on individual bank stocks might be a bit myopic when the potential “real” insight is that the past 28 years of financial market deregulation has reversed. Plainly something has changed, and changed materially. To be sure, the tidal wave of zaitechism began reversing with SARBOX and the reversal has been accelerating ever since. Recently the ebb tide has turned into a “rip tide” as the spider web of financial engineering was exposed by the collapse of many toxically-structured investment vehicles (SIVs, SPIVs, VIEs, etc.) and punctuated by Bear Stearns’ (NYSE:BSC) bouleversement. Consequently, the tide is now flowing “out” after nearly three decades of financialization, which will no doubt crimp financial sector profitability with a concurrent “hit” to PE multiples.
Ladies and gentleman, investing environments tend to change at the MARGIN. Yet since life can only be understood in retrospect, but must be lived going forward, most investors fail to notice tectonic changes until it is too late. The current case in point is that I have avoided large capitalization banks for years, and continue to avoid them, since their fate was sealed when financial deregulation ended.
The call for this week: The lyrics to the song “Ebb Tide” read like this: “First the tide rushes in/ Plants a kiss on the shore/ Then rolls out to sea/ And the sea is very still once more.” Unfortunately, we think the tide is now going out for many of the financial stocks after nearly three decades of financialization, which should crimp the sector’s profitability with a concurrent compression of PE multiples. The quid pro quo is that we believe the tidal wave has rolled on to “stuff;” and that wave has a long way to go. If correct, Alaska’s vast amount of undeveloped natural resources will eventually be developed. A circumvential “play” on this is 7% yielding Outperform-rated Alaska Communications (NASDAQ:ALSK). And, don’t look now but last Monday the 10-year T’Note (TNX) was yielding 3.43%, but at last Friday’s high was yielding 3.85%, which is pretty strange action in front of the widely anticipated recession. Indeed, curiouser and curiouser.