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Op-Ed: Bank Bears Lose Their Mojo?

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Analysts may be shocked by postive upshot in second quarter.

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Editor's Note: As an emerging-markets banking analyst, James Kostohryz has firsthand experience of banking collapses and their subsequent resolutions in Mexico, Argentina and Southeast Asia. Since leaving his position as Head of International Investments at Brazil's Banco Pactual in 2000, James has worked as an independent trader and investor.

It seems like there's an increasingly muted impact from the negative comments coming from bank analysts. The reaction can be perceived, as was the case today with the Mike Mayo reports, but it's very attenuated compared to recent experience. In particular, Meredith Whitney has been on the war path lately, and her message doesn't seem to be getting much traction in terms of share price action (XLF, UYG, FAS).

My interpretation: Institutional money is drastically underweight financials. At this point, these managers simply cannot afford to risk the possibility that Ms. Whitney and the other bears might be wrong this time. Even if they fundamentally agree with her and the other bears, they know that being wrong on this is a risk they cannot afford to take. For being heavily underweight financials in the midst of a strong rally in the group could cost these portfolio managers their jobs.

There's simply no other sector of the market that poses the sort of upside risks, in terms of relative portfolio performance, as financials. How about the downside risks of being long financials? Remember that most institutional managers are evaluated based on their performance relative to their benchmark index, so there's virtually no risk to simply "covering" their underweight in financials. Buying financials is the most "conservative" thing for these managers to do (in terms of their own job safety).

By the way: Fundamentally, I think Ms. Whitney may suffer a bit of "seller's remorse" in the course of the second quarter. Her whole bearish premise on the banks right now is essentially a macroeconomic one - that the economy will be getting worse in the short and medium term.

As per my article yesterday, Op-Ed: Surprises Continue to Drive the Rally, I think the second-quarter economic numbers are going to be an upside shocker to her and everybody else. If I'm right, banks are going to fly in the second quarter.
Positions in BAC, FAS

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