Wednesday, January 16, 2008

Time to Buy Financials?

(Here's a little exchange from last night's Kudlow & Company with Quentin Hardy. He's the Silicon Valley Bureau Chief for Forbes magazine.)

HARDY: Okay Larry, I'm ready for the positive on Citigroup. How'd you like that little fact today?

KUDLOW: Alright, I'll give you the positive on Citigroup. I think this is balance sheet rebuilding and repair. And I think that all these banks -- whether it's Citi, or Merrill, or Bear Stearns -- they're raising capital. They're scoring their losses. Investors who are watching this ought to have some longer-term view than just what the traders are doing. Nobody is smart enough to know [how to time the market]. That's my point.

I'm a guy who looks at the basic fundamentals of the economy. And I see good things happening, including balance sheet repairs. In the money markets, the Libor rate has suddenly fallen below the federal funds rate. The Ted spread has narrowed in these markets. In other words, at the very moment that [some bulls] are jumping ship, the credit spreads are getting narrower in the short-term funding markets. The Fed's decision to ease has been made. And banks are taking significant steps to repair their balance sheets. Even though some people might not be happy with the speed, the reality is things are improving.

[Long-time bear] Dougie Kass comes on the show quite a bit. He said this the other night on this program. He's written it up for The He says buy the financials. Yes, BUY. And he works through a lot of the points that I've been making, including the balance sheet repair, and the lack, the diminution, the easing of the credit strains in the money markets. The very things that I was very worried about -- whether it's asset-backed commercial paper, or the Libor problem, [etc] -- now these things are easing. Some of the central bank liquidity activities are taking hold. There's much more to come. Here's my friend Doug Kass -- almost a permabear -- he's saying buy financials.