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Street Fight: Analysts Battle Over the Bottom in Financials

Posted Aug 12, 2008 02:42pm EDT by Henry Blodget in Investing, Recession, Banking

From ClusterStock, August 12, 2008:

Financial stocks are nowhere close to a bottom. Net charge-offs and non-performing loans are still growing. Banks will have to raise more capital to plug balance sheet holes, further diluting current shareholders. Etc.

So goes the bear argument. Tom Brown at Bankstocks.com begs to differ.

As my guest Barry Ritholtz of Fusion IQ and The Big Picture and I discuss, Brown points out that, historically, markets tend to anticipate improving metrics rather than respond to them. If you wait to see improving loan performance, argues Brown, you'll miss most of the rally. Brown compares today's crisis to the crisis and recover in the early 90s.

If you waited until 1992, when chargeoffs started to improve, you would have missed half of the rally:

Remember, the market is a discounting machine: it anticipates key events so early on the vast majority of investors don’t even think those events are possible. In the case of the financials now, that means stock prices will turn higher (and already have, I believe) when most investors believe that things are still getting worse. It happens every cycle.

So there’s no use trying to concoct your own list of mental milestones. Instead, go back and look at what happened (and in what order) during the last major credit crackup, in 1990-91. If you do, you’ll see that the bears have things all backwards. By the time their wish lists happen, the stocks will be zooming.

The danger, of course, is that you could have used a similar line of reasoning to argue that the sector bottomed two months ago. It all comes down to what happens to the value of the assets on the balance sheets: If they continue to drop and banks are forced to take more multibillion-dollar losses, Meredith Whitney will be right. If not, Tom Brown can continue riding this rally to victory.

Note: Tom Brown will join me on Tech Ticker this Thursday to defend his views.

30 Comments

Reedersong
Reedersong - Tuesday August 12, 2008 03:01PM EDT

Pandering.

joe
joe - Tuesday August 12, 2008 03:10PM EDT

Meandering

culcuhain
culcuhain - Tuesday August 12, 2008 03:13PM EDT

Y M C A

Chuck
Chuck - Tuesday August 12, 2008 03:13PM EDT

Enforce the naked short selling! Why-oh-why have a rule that you don't enforce? Obviously, the SEC proved that they COULD enforce it, if they chose to. I could care less if it adds a time delay to trades. That couldn't hurt, either. I guess that with the financials recovering, the hope was that the shorts would get their teeth kicked in. But, they showed that they have the horsepower.

Yahoo! Finance User
Yahoo! Finance User - Tuesday August 12, 2008 03:20PM EDT

Bank stocks will go down another 40%.

Yahoo! Finance User
Yahoo! Finance User - Tuesday August 12, 2008 03:21PM EDT

Laundering...

Tex
Tex - Tuesday August 12, 2008 03:23PM EDT

I blame the Republican administration.

Buzz
Buzz - Tuesday August 12, 2008 03:34PM EDT

If you are going to sit on cash, why not sit on a falling stock that will rise before you would have bought it with the cash.

__A_YAHOO_USER__
__A_YAHOO_USER__ - Tuesday August 12, 2008 03:36PM EDT

I blame the Democrats.

Chuck
Chuck - Tuesday August 12, 2008 03:38PM EDT

Bank stocks will go up 200%. Based on precisely the same rationale as comment, "Bank stocks will go down another 40%."

Thomas
Thomas - Tuesday August 12, 2008 03:40PM EDT

I'm waiting for the commercial real estate side to throw it in..........talk about writeoffs !!!!!!! The effect will include one hell of a wrestling match as the partners on commercial deals will: A.Fight for additional cash to finish wip. B.Try and simply walk. C.Litigate. D.Wiggle out of PGs. E.All of the above............ Want to see paralysis within committees ? At least residential loans are qualified by simple measures but not on the commercial side. Was that "another shoe" or an earthquake ? "Everyone stay calm !"

Yahoo! Finance User
Yahoo! Finance User - Tuesday August 12, 2008 03:43PM EDT

Who, besides day traders, would be so concerned about accurately picking the bottom? XLF, VFH and other financial sector funds are great buys right now. They may go down more, but if you're in it for more than a couple months, they're a great deal.

Giovanni
Giovanni - Tuesday August 12, 2008 03:46PM EDT

Thanks to the likes of Meredith Whitney, Michael Price and Barry the Bellicose I am picking up C, JPM, WB and their preferred shares cheap. If they go lower I pick more of the shares up. Listen, if you want to make $$$ you have to buy when their is good old fashioned blood on the streets. Thanks to these one trick pony analysts the time is NOW to buy C, WB, JPM..

JohnD
JohnD - Tuesday August 12, 2008 04:14PM EDT

buy low sell high

anil
anil - Tuesday August 12, 2008 04:36PM EDT

After JPM chase announced the result and it was better than the expected one market went up assuming we already at the bottom and time to go up. Look at the data for housing and credit crunch. Makes it clear that there is stil pain in the market. To come out of the housing slump itself 6 months are required. Right now sell off is the best option. Another point to consider is the oil price which is continuously going can bounce back to high.

Chuck
Chuck - Tuesday August 12, 2008 04:48PM EDT

How about that John Edwards? I read that he is in collusion with the banks to fund a massive program to come into your neighborhood and kill your puppies! I'm for it! What do you think?

Chuck
Chuck - Tuesday August 12, 2008 04:54PM EDT

How CONVENIENT that all of this bad news broke on the day that the naked short selling "rule" expired... How CONV-E-E-E-E-N-I-E-N-T...indeed...

harry
harry - Tuesday August 12, 2008 05:46PM EDT

big deal

James H
James H - Tuesday August 12, 2008 05:53PM EDT

philandering

BIRD 33
BIRD 33 - Tuesday August 12, 2008 06:30PM EDT

These big banks deserve all the fallout they get. There CEO and CFO filled their pockets with Millions & Billions over the past 5 years, so they are fine, if they fail they will get bailed out, but not the homeowners that bought those home at bank inflated pirces, if they walk away it takes 10 years to repair their credit, the banks are back up and running the next day.

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