Tobias Levkovich, Citi's chief U.S. stock market strategist, was recently interviewed by the Swiss financial publication Finanz und Wirtschaft.
He is currently bullish on banks. Yes, the financials are currently the most out-of-favor sector out there but Levkovich is not alone in declaring that value is available today.
Levkovich makes a number of good points, some from a historical perspective and some from a contrarian perspective.
Despite his feeling that we are already in a recession, he feels it is already priced into certain market sectors. Overall, he points out, recessions have typically resulted in market drops in the 15% to 20% range with the exception of the deeper bear markets in 1974 and 2001. 1974 and 2001 had extreme circumstances that cause Levkovich to exclude them from his analysis. With markets having already declined into this 15% to 20% range, Levkovich feels that the bottom will be established very soon.
At this point, readers may want to point out that the current real estate mess and credit crunch are also extreme circumstances that may make this market react more like it did in '74 and '01 and move beyond the level of a 20% decline. Levkovich points to the U.S. consumer and indicates that if things were as bad as '74 and '01 that consumption would have collapsed. So far, there has been a contraction but not a collapse.
Within the financial sector, Levkovich is especially favoring insurers and diversified banks. This is despite Warren Buffet recently saying that insurer profits will be under pressure.
When questioned on how he could be recommending banks at this time, Levkovich responds that the time to buy shares is when no one else will, when there is panic in the air. This is spoken like a true contrarian and value investor. One of the points he makes is that it is unlikely that investors will be surprised with further bad news on the scale which has already been revealed in the second half of 2007 and so far this year. By the time we reach the second half of 2008, all the negative news will be fully known and bank shares will be ready to rebound. Furthermore, he says banks are more undervalued today than they were during the savings and loan crisis. As a final note, Levkovich points to the steepening of the yield curve as a positive for banks.
Levkovich makes some of the same points as some of the other well known value investors. I suspect that for patient investors that can afford to average down into the financials and wait for the rebound this is reasonable advice.
There are those who might say that Levkovich works for a bank, one that is in trouble, so of course he is going to be positive on banks. That could be true but I prefer to hope that he is independent enough to have his own opinion.
So, do I agree with Levkovich or not?
I think it is a matter of timing. At some point, financial firms will certainly get their houses in order. The stocks will more than likely begin to recover well before the healing process is complete. I suspect there is no hurry to begin buying banks. And so, in the meantime, I will hold on to my investment in the ProShares UltraShort Financial ETF (SKF) a little while longer.
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