Why financials are on the cusp of a big 2012:
Financials are outrageously cheap on an historical basis. Capital levels broadly are higher than at any other time in the last 50 years. An investor can currently buy money center banks in several cases at a discount to liquidation value (tangible book value) and get the ongoing franchises for free. No matter how in?flux their franchises might be, the only way these stock prices can be rationally justified is if assets are fraudulently priced on the banks’ books (highly unlikely after four years of regulatory and auditor scrutiny) or the US economy is about to collapse (also highly unlikely given the aggressive Fed stance and lack of cyclical excesses in the economy).
Europe is not going to blow up. While problems certainly exist, there is no smoldering “Lehman Moment” coming. Authorities are galvanized on both sides of the pond to meet any potential crisis. The recent ECB funding is a lifeline to weaker institutions and allows those banks the time to sell assets and recapitalize in an orderly fashion. Further, even if Europe were to fall into a significant recession, this has never “pushed” the US into recession historically. Only 10% of US GDP is tied directly to Europe; if Europe suffers a 2% contraction, the impact on US GDP should be de minimis.
The US economy is getting better. Recent data have consistently exceeded expectations(employment, retail sales, etc.) despite the best efforts of the markets and the media to scare the pants off of the average American consumer. Are “Joe Six?Pack” and his girl really going to alter their spending patterns because the Italian 10 year yield is breaking over 7%? All Americans really care about is whether they have a job, and well over 2 million new jobs have been created this year. Strangely enough, the only Americans who appear to have had their behavior impacted by the news from Europe are corporate CEOs. This is clear in the Q3 GDP data. Corporations ran down inventories in preparation for a material consumer slowdown that never came. Corporate America has had to play catch up in the 4th quarter to meet normalized consumer demand.