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Time For Another Look At Banks?

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Banks can reinvent themselves quickly and easily.

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Yes, it is true the banks have been decimated over the last couple of months. Yes, it is true that the future for the banking system and financial structure sure does look scary and yes, it is true that for months, I have not liked the sector or believe it was worthy of holding.

However, with all that being said, are the major banks, such as Citigroup (C), Bank of America (BAC), JP Morgan (JPM), Wells Fargo (WFC) or Washington Mutual (WM) an area you should consider? Well, after many months and several percentage points off highs, I am going to say "yes."

The debate is already starting on whether or not the banks have bottomed. We have seen a bid underneath these stocks and they are showing some relative strength, but they have also spent significant time behind the woodshed and it only makes sense that these stocks will at least temporarily receive a break from the beating. From a fundamental standpoint, one has absolutely no idea if these stocks are a deep discount value yet, simply because no one has enough information to recreate an actual balance sheet. In fact, it is safe to assume that anyone who is calculating a real intrinsic value is absolutely giving it their best guess.

From a technical standpoint, these stocks are in no man's land and look to have started a steep decline that may have further to go. Furthermore, technical analysis 101 will tell you that when action such as this finally does find a bottom, it will be dead money for a very long time and take even longer to show any capital gain whatsoever.

So why in the world would anyone suggest wading into these fallen stocks? Well, let's take a quick glance at the history of Citigroup and how it has handled other steep declines. During the S&L crisis in 1998, Citigroup fell from a high of $34.03 in July of 1998, to a low of $13.30 in October of the same year. This 61% decline took place in less than four months. The sell off was sharp, steep and very rapid but after the bottom was in the stock went on to move from a low of $13.30 to a high of $38.21 at the end of October 28, 1999. Rather than being dead money the stock not only went on to new highs within a few months, but from bottom to top saw a stellar 187% move.

While it wasn't as sharp, Citigroup saw its next big bout of selling pressure during the broad market decline starting in 2000. From a high of $55.15 seen in September 2000 the stock dropped 58.6% to see a low of $22.83 on July 25, 2002. While the decline took much longer than the 1998 swift correction, the net result was approximately the same. After bottoming, approximately one year later the stock saw a high of $48.15, which was a very attractive 111% return.

From its high of $57.00, reached on December 28th 2006, Citigroup has fallen to a low on Friday of $31.05, dropping approximately 45.53%. History tells us we may still have a ways to go and a true 60% drop for the stock would take it down to $22.80, which would ironically be three cents below the 2002 bottom. From today's price, as I write, of $34.94, this would be another $12.14 or 34.75%. We aren't quite sure whether or not this will actually transpire but we may very well be getting close to the point at which a starter position may be worthwhile.

Pundits have already stated that these stocks may be bottoming but should be avoided due to them being dead money. I tend to disagree with this simply because banks today can reinvent themselves quickly and easily. Unlike other companies who produce a set product or service, a bank can participate in a wide variety of revenue producing objectives. I tend to believe that if the global economy continues to grow, our major banks and financial institutions will participate and benefit accordingly. This is a reason, I believe, that in the past, banks have not remained stagnant for years after finding a bottom, rather they go on to advance to new highs very quickly.

We may have another leg, but if you have the right time frame of the next three to five years, I absolutely think a dollar cost averaging strategy with a few of the major banks will serve you well. Consider starting with a 1/3 investment and watching closely for another big drop. If it comes, be on the look out for that $22.80 area and consider another piece in the low $30's for our example of Citigroup.

I suspect that over the next several years, anyone who does wade into this carnage will be very glad they did.
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