Should You Own Financials Right Now?

Should anyone in their right mind own any financials? Is now the time to scoop up "bargains?"

Bear StearnsBSC closed at $56 on Thursday, then closed at $30 on Friday. You may have seen Jim Cramer mention that there would be some sort of take under, but I don't think anyone was expecting $2 per share for the equity.

The rest of the financial sector is down in some measure as well, in what has been a continuing theme. The Financial Select Sector SPDRXLF is off, as are stocks such as Morgan StanleyMS, CitigroupC, Merrill LynchMER, Goldman SachsGS, Lehman BrothersLEH and E*TradeETFC.

I have been making comments since late 2005 about this entire business. When the yield curve inverts or takes on an abnormal shape, it creates a bad fundamental environment for financial stocks. Accessing capital becomes more difficult and normal lending becomes less profitable.

The simple act of underweighting financials and waiting for things to normalize is the best positioning for an investor (as differentiated from a trader).

Right here, right now, the curve is not normal. I was on CNBC about a week and a half ago talking about this subject. The other person in the debate made a case for financials because of the SWF investments. She noted that the spread between yields on two-year and 10-year Treasurys was very wide.

Unfortunately, the SWF investments creates no cause and effect for prices and banks do not lend off of the 2-10 spread.

In trying to figure out whether bargains can be had, I think you need to ask yourself: Do you need to be the one to catch the absolute bottom?

Currently, there is no fundamental underpinning that favors the sector. The yield curve is not yet normal, the full magnitude of the writedowns is not yet known and the Fed is still in scramble /reactive mode trying to figure out what to do.

Big market events usually include large spectacular failures. Is Bear Stearns ($20 billion at its peak) big enough, or is a larger failure needed to appease? I certainly do not know, but at this point we shouldn't be surprised by anything.

Throughout all of this, I have been writing about being underweight the financial sector -- mostly with foreign banks. I will keep that position at a minimum until the entire curve normalizes.

This will likely occur after the stocks bottom out, so if you are a trader, this advice will not suit you.

But, it makes no sense to me for an investor to take the risk of an equalweight or overweight position until there is fundamental support.

The financial sector is currently 16.2% in financials and I am about 12% allocated.

You may wonder -- why not go zero in financials?

This is a philosophical issue. Going zero in anything is a big bet. When the bottom comes (today? a year from now?) the bounce will be very big, and it will come with no warning.

An underweight position, as opposed to zero, means you would lag a big bounce --which is much better than missing it completely.