Mark Hines

Mean Reversion and Cheap Financial Stocks

Hi Bill,
The mean is the overall US Equity Market. No matter what proxy you use (Russell 3000, S&P500, etc), the Financial Services stocks have underperformed. They’ve been lagging pretty much all year (especially over the last three months).

I have been waiting for something in the market to initiate a regression toward the mean, and I think we may have gotten it on Tuesday via the Fed rate cuts and the better than expected earnings announcement from Lehman Brothers (Lehman has significant exposure to subprime credit markets, which has been the main source of fear that caused poor Financial Services performance in the first place).

I did not calculate the standard deviation, but you can do it easily by pulling historical data from Yahoo!Finance, pasting it into Excel, and using the statistics functions and data analysis toolpack.

I do think a lot of the financial stocks will make a strong run and outperform the overall market. Some of my favorites are Fortress Investment Group (FIG), the Blackstone Group (BX), and almost all of the bulge bracket investment banks (MER, GS, BSC, LEH, etc). You are welcome to continue the discussion, and check out all of my holdings at TheClearmarkFund.com.