Street Fight: Analysts Battle Over the Bottom in Financials

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.