I'll stat the obvious here, that there will be a tremendous opportunity to make money on financials.  The questions are, when and how?  As I think about this it would be great to hear from others who might have ideas on how to make some real money on financials when and if they recover.  Give me a holler if you want to trade notes and ideas over this.

Pres. 

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There is a difference between recovery and a new reality. Manipulation and bad business practices got us into the mess we're in, but also allowed for the previous bouyant trading environment. It may be that at least some stocks are coming back down to earth to where they should actually be valued.

If people are looking for things to go back to the way they were, you are in for a big surprise. The only thing we can do is take a closer look at companies as a whole and everything they are involved in and make trading decisions based on that information. Otherwise you are throwing the dice when you trade and will lose 1 out of 6 times. This assumes a 6-sided dice of course, and perhaps the way things are we should be rolling Dungeons and Dragons dice.

Here's my simple answer:   I think financials will begin to recover sometime (a year or so) after we begin to see a turnaround in the housing market.

I wouldn't touch anything in the financials until the book values are re evaluated. The banks and brokerages have borrowed over one trillion dollars so far from the Feds begging bowl. How could this be a positive for price to book as the borrowing is not stabilizing, but ongoing? How can a value be put on these equities?

Will Profit,

I have heard, I believe it was on Bloomgerg Radio, an analyst say just what you stated.  That is that current book values are overstated, and that they will have to come down since there has been a big fall in real estate values.  If that is the case then the Street will be re-evaluating their price targets.   Thanks, good post.

UPod,

Recognizing a turn around in the real estate market is the rubb. The problem I see is finding a catalysts for a rebound in the profits of financial institutions.  With interests rates likely headed up, that will be a headwind for the real estate market and for banks.

Thanks! 

corbin2,

My thesis is that financials will recover.  My first question is will that happen?  The second question is when will it happen?  The third question is what might make it happen?  And finally will financials recover to a degree to make it worth while putting money to work in them?

What would disprove my thesis?  The most likely reality is if the Fed fears inflation more than a collapsing economy raises intersts rate dramatically.  The Fed is already in a bind in that they are now in a pickle between raising inflation, and rising unemployment.  There is also risk from Congress doing somthing stupid which is likely.  I still think that at some point the economy will be situated to recover, and policy from the Fed, and regulators will support liquitity which will be good for financial in a rising economy.  But that could be 10 years from now.  Just some of the quesitons I have.

The financials will eventually recover (to what degree? Who knows?), but you may need to be able to speak Mandarin Chinese, Arabic or Russian in order to conduct business with them.

That's O.K. with me, as long as they are making money off of the Chinese, Arabs, and Russians. ;)

Pres. 

As an investor, whenever you decide financials have bottomed out and it's time to throw your hat in the ring, stay away from regionals. Stick with the big multinationals like CitiGroup, Bank of America, JP Morgan Chase, etc. which benefit from global exposure. I think it's too early to say that the lion's share of liquidity issues are behind banks. U.S. Treasury Secretary Paulson is encouraging banks to raise their own capital if needed and Bank of America is airing commercials asking depositors to save more! Liquidity still seems to be a serious issue.

One point to keep in mind with the potentially huge exposures is - and it's difficult for financials - which companies have significant value even if you were to wipe out the equity on the books?

I think that leaves you with a very short list, headed by American Express (AXP). Simply put, American Express, even with a terrible balance sheet, is an extremely valuable company. It also happens to be on several "best ideas" lists from leading hedge funds.
While it might be easy to love Visa and Mastercard, I'm skeptical that those will continue to be great long trades exactly because they're just too easy to get behind.

AXP is a good suggestion.  I have it on my watch list.  I have done some credit spreads on MA but I don't want to own the stock.  AXP is a company I might want to own sometime in the next six to twelve months.  BAC might also be a buy once we can tell that the wirte-down are coming to an end, and the book value is acurately calculated based on current reality.  C might also be worth a look at some point but I see it as the more speculative play.

If nothing will change, from technical perspective I expect financial to have reasonable bounce from mid July, again - 3 weeks to go, a lot can change. As an example, BAC I was advising against for a long time put very nice volume last 2 days, it will take few more days for some dust to settle, but looks like panic to me now ...soon to reverse?

To answer the question of "when?", Tuesday would have been a good time. ;)