So what’s feeding the new bullishness in the financial sector stocks? Citigroup’s leaked memo about its alleged profitability helped. As did the impression that Goldman Sachs and Morgan Stanley may have had a strong quarter in prop trading and lack exposure to consumer credit problems.
But more is at work than just these factors. We’re frequently hearing a mantra we had hoped had died and gone to Hell–the idea that the write-downs at banks have been so extreme that they are poised for a big comeback as assets surge in value once more. The idea is that the banks have written down everything, including the “kitchen sink,” so all the losses are baked in. Each and every time we’ve heard that, it has been a contrary indicator. The words “kitchen sink” have actually served as a warning signal that the market is too optimistic about financial stocks.
And, yep, here they are again, rising up from the grave in Barron’s:
Sveinn Palsson, a Credit Suisse derivatives strategists, is telling clients to be cautious ahead of the first-quarter earnings season for banks, which starts in April — even though he concedes the numbers could look good due to the “kitchen sink” effect.
“Aggressive markdowns of assets and a tendency to realise losses all at once while competitors are doing so, too, could make Q1 look good in comparison with 2008 for a host of banks,” Palsson says, but he warns the situation could prove temporary as the economy has yet to show any signs of stabilizing.
Too many times have we seen the “kitchen sink effect” become the “toilet effect,” with investors getting flushed right down the drain.