As weeks and months pass by, and even as today’s trading day progresses, we keep hearing about the troubles of our financial institutions, brokerages and banks and how there is even more to come. Worries about further write-downs by banks keep many worried that banks’ balance sheets will continue to be troublesome, and liquidity will continue to be scarce. Today, many Wall Street analysts continue to express fears of subprime mortgage mess, as they believe that we might soon see another downward trend coming due to credit-related crunch, write-downs, mortgage, it’s going to get worse….ok, now I’m bored!
How long can one beat the same horse? When you get to the point that bad news is actually not bad any more, but is expected, and when you get to the point that reaction to the analysis is opposite, you might ask yourself if one's beating the same story over and over again, and that (perhaps) some things might be already fully priced in? Ok, there may be an additional write-down or two, but we know that already! Welcome to the new economy! Get used to it!
In my humble opinion we are about to witness an obvious capitulation in the financial sector. Volumes to the downside are drying up, and soon we’ll have a major rally in financial stocks. As we know, many have shorted these stocks to the oblivion. Add to that massive put buying in the option world, and you have a perfect scenario for a massive short-covering that might be lurking around the corner.
So, yes, write-downs are bad, and yes…they have already happened! And yes, we know, they will probably widen with some banks. But market is forward thinking. Those have corrected. Market has already priced those in, and it’s time to move on. Rather take a deep breath and re-calculate their ROE’s or their PEGs, and realize that you have an opportunity to invest in largest world institutions and mega-houses at deeply discounted prices, with amazing risk/reward ratios. News was bad, but the sell off magnitude was worse. As usual, exaggeration across the board. Soon, we can expect analysts coming out speculating about future mergers and acquisitions within weakened financial sector, where strong eats the weak, which then could open a new path for now-bullish news in months to come. Welcome to the early stages of a new sector rotation!
Disclosure: Author holds a long position in some of the above-mentioned stocks