Kass Katch: Buy the Financials. Yes, Buy

Government policy will not be standing still. Treasury Secretary Paulson's first pass at shoring up the mortgage market got an F from The Edge. It was dead at birth. Nevertheless, more cogent policy is likely ahead (formulated by both the Republican and Democratic parties). This might be especially true in an important election year.

The seized-up credit markets will not be a permanent condition. Indeed, improving Libor and TED spreads (recently ignored by the marketplace) are seemingly presaging a more normal credit market. Historically, this has been constructive for the financial sector.

Credit writedowns will likely peak in fourth quarter 2007. I estimate that about $125 billion to $135 billion of writedowns will have been taken in the financial sector in 2007; that figure should drop to only $35 billion to $50 billion in 2008. If this is correct, financial sector profit growth could add several percentage points to the S&P's 2008 earnings.

The opaque disclosures of 2004 to 2007, bogus pricing and "marked to modeling" of earning assets (especially of a credit kind) have been replaced by vicious, monumental and historical writedowns. Though this is difficult to quantify, it is possible that if the recession is relatively shallow, then the period of maximum pain is now behind most financial institutions. (My view has been clear -- namely, that the recession will be deeper and longer than most expect, but I could be wrong. And a portion of every portfolio should be viewed as a hedge against one's economic blueprint.)