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Kass: Bank Stocks Capitulating?

This blog post originally appeared on RealMoney Silver on June 3 at 7:56 a.m. EDT.

Capitulation*

We can never know about the market for bank stocks in the days to come
But I think about them anyway,
And I wonder if I should be long with you now
Or, like Meredith Whitney, chasin' after some finer day.

Capitulation, capitulation
Was makin' me late
It was keepin' me waitin'

And I tell you how easy it now feels to be long with you
And how right those banks feel in my portfolio
But I rehearsed those lines just late last night before Kudlow
When I was thinkin' about how right being long 'em might be

Capitulation, capitulation
Was makin' me late
It was keepin' me waitin'

By tomorrow we will still be long together
I'm no prophet and I don't know nature's ways
So I'll try and see into Dick Bove's eyes right now
And stay long here 'cause these are the good old days

(These are the good old days)
And stay long 'cause these are the good old days
(These are the good old days)
(These are the good old days)
(These are the good old days)
(These are.....the good old days)

*With apologies to Carly Simon's "Anticipation"

Though we are approaching the beginning of summer, my developing bullish view on bank stocks might be like buying straw hats in the winter.

Quite frankly, I sense a growing likelihood that Capitulation (with a capital C) has emerged in the past week for bank stocks, recently fueled in part by the following developments and thin-reed indicators:

  • Standard and Poor's (those wonderful folks who ignored the housing and subprime problems in 2005-2007 until it was too late) downgraded several investment banks on Monday. From my perch, Standard and Poor's move was valueless to equity investors, was instituted very late in the cycle and might have served to put a bottom in the financial sector.
  • Both Wachovia (WB) and Washington Mutual (WM) have ousted their chairmen, as they follow the ousting of financial industry ne'er-do-wells Stan O'Neal from Merrill Lynch (MER), Chuck Prince from Citigroup (C) and James Cayne from Bear Stears (BSC). Responsible industry leadership is a necessary ingredient toward effective management and rationalization of the banking industry's assets.
  • Lehman Brothers (LEH) is rumored to need more capital -- only two months after its CFO protested too much. The Lehman raise (if factual) will likely nearly conclude the curative process of necessary capital raises. (Ironically, it appears that Lehman's short-term profit problem stems from it being short the ABX and CMBS indices as a hedge against its business book. Memo to investors: The fact that those indices are rising is forward looking and positive development.)
  • The media (those wonderful folks who, similar to the rating agencies, ignored the housing and subprime problems in 2005-2007) now appear to be universally bearish on bank stocks.
  • In response to my recent change of heart on banks, the emails I'm getting and numerous financial blogs are expressing an almost unanimous disbelief in my bullish stance -- though there has been limited discourse regarding my fundamental analysis. Many of the same questioned, as vociferously, my shorts in housing, private mortgage insurers, mortgage originators/servicers and homebuilders two years ago.

Excellent Long-Term Value

I don't mean to be too glib and anecdotal. I fully recognize the formidable challenges facing many banks. I would refer readers to yesterday's column, however, in which I expanded on the fundamental case for buying selectively in the banking industry. In that piece, I suggested that while the crowd usually outsmarts the remnants, unconventional calls (particularly following a devastating share decline) are almost always disregarded and/or criticized but contrarian bets that ignore the short-term trend, the poor stock charts and the prevailing negative bias can often yield large returns.

As I wrote on Monday, history teaches us investment, but it fails to tell us which lesson should be applied and when it should be adopted. The biggest problem I have as an investor is farsightedness (in expecting the unexpected) and I see the biggest problem with most investors (especially trigger-happy hedge funds seeking short-term satisfaction) as being shortsighted.

Bank stocks have never been so cheap, and their core profit generators (deposit growth, loan growth, spreads and net interest income) remain intact and will, in the fullness of time, turn more positively.

Buy straw hats. Banks represent excellent long-term value.

Doug Kass is the author of The Edge, a blog on RealMoney Silver that features real-time shorting opportunities on the market.

At the time of publication, Kass and/or his funds were long Citigroup, although holdings can change at any time.

Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd.

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