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The Other Side of the Banks

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Are financials ripe for a trade?

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I've been talking with some of the sharper cookies I know on the current state of affairs in the financials. The bear case has been well documented in Minyanville. Succo, Bennet, Minyan Peter, Pepe -- among others -- have been monitoring the risks for quite some time. While I was early in identifying the potential pitfalls (not necessarily a good thing), I continue to respect the potential for contagion as credit and derivatives make for a most toxic mix.

With that said, there are always two sides to every trade and thats the point of this column. If you were to ask me, way back when, what I would be looking at for a potential turn, I would have listed the following elements as constructive signs:

  • Time and price. We're now more than one year and 40% from the highs in the BKX (Philadelphia Banking Index), with many of the individual issues suffering far deeper losses.

  • Analyst revisions and downgrades. Wall Street has turned decidedly negative on the money center banks. Measuring "holds and sells vs. buys", we find a 68% weighting in Citigroup (C), 64% reading in Bank America (BAC), 45% in JP Morgan Chase (JPM), 76% in Wachovia (WB) and 55% in Wells Fargo (WFC). Yes, they have room, so to speak, but herd has shifted course.

  • Sentiment. As universally loved as these banks were a year ago, they're equally despised now. From the back pages of brokerage disclaimers to the front page of the New York Times, everyone seems to be on the bearish bank bandwagon.

Yes, there's still risk -- both to the banks and to the tape in general -- and I'm quite sure that this column will raise eyebrows and ire, much as the negative prose did a year ago. And that's sorta my point. The path of maximum frustration may not be what it seems.

I continue to feel that longer-term risk remains and higher prices, when they arrive, can be used to lighten up the load. I'm just putting this out there with the caveat that it may be early and the understanding that it feels completely wrong.

The easy trade, as they say, is likely in the rear-view mirror and emotional decisions always seem to come back to bite us.

R.P.

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