Go With the Banks, Not the Builders

Someone asked me today if I still liked the banks and the homebuilders or if I have joined Ron Insana in wanting to be out of them.

First, I never liked the homebuilders. What's happening out there, the massive sales of existing and foreclosed homes, will keep a lid on prices, and you need rising prices and dramatically lower inventory to make a compelling case for KB Home (KBH - commentary - Trade Now) or Pulte (PHM - commentary - Trade Now) or D.R. Horton (DHI - commentary - Trade Now) or especially Hovnanian (HOV - commentary - Trade Now).

Even if Ron changed his mind and went back in, I would avoid them until the home sale price, not the home sales, appreciates and I don't think that will happen even in 2010. Stabilization, as I always say, does not equal appreciation.

Dougie Kass shot me a piece about a possible Toll Brothers (TOL - commentary - Trade Now) upside surprise on the horizon, obviously good news, but it doesn't intrigue me as much as the banks, where I anticipate many upside surprises.

The banks? What can I say? There were so many secondaries done at much lower levels that the chance to lock in profits is too juicy to miss. But I think the banks are going to have a multiyear move, and I am not a buyer of Dick Bove's logic, as I see he has fled the group, at least according to televised reports.

I have positions in JPMorgan Chase (JPM - commentary - Trade Now), Bank of America (BAC - commentary - Trade Now), Wells Fargo (WFC - commentary - Trade Now) and Goldman Sachs (GS - commentary - Trade Now), and I want to use the weakness to buy more WFC, as that one could fall below my basis. Why? Because the earnings power of a company like Wells could be gigantic, and because I simply do not believe that the company is in nearly as bad a shape as everyone says.

Do I see more downside in the banks? Given the parabolic move off the lows, sure. Do I want to cut and run? I don't know. If I were at my hedge fund, I would probably try to do some exquisite timing, selling some BAC at $15 to buy it back at $14.

But that's not what I do anymore.

The short-term direction is in favor of the bears. Longer term, though? I would welcome any of the old buyers, like Ron, back in the stocks. Obviously we aren't in the first inning, or the second. Let's call it the middle innings.

A lot of baseball left to enjoy.

At the time of publication, Cramer was long JPM, WFC, GS and BAC.

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