"I think we're going to see a very big January effect," he said. "Most desks between now and yearend are going to slow down. Most of the activity in the equities business is probably macro or multi-strategy funds. I think come January, people are going to say financials are cheap."
I spoke to Lee after he appeared with Maria Bartiromo Thursday on "Closing Bell," where he spelled out his view that financial stocks will lead the stock market higher in 2008. Now, it's been that very group that has been at the epicenter of the market's hysteria this year and has been walloped by the housing slowdown and credit market crises.
Financials - Friend or Foe?
The S&P 500 financial sector was down 6.12 percent this week and 20.75 percent for the year-to-date. Some stocks, like Citigroup, are down 40 percent or more from their highs. Citigroup stock was under pressure this past week even after it named insider Vikram Pandit CEO. Shortly after his appointment, Citigroup announced a plan to bail out its structured investment vehicles, by moving $49 billion onto its balance sheet. The move impacts Citi's capital base but it was mostly seen as a positive.
"I think there's growing evidence that looking at bottoms for financials, based on credit markets, is a better way then p/e (price to earnings) or price to book. Our own credit teams are very bearish on high-yield through year end. But they see the situation improving noticeably after December 31st," he said.
Lee explained that he and his team looked back over 100 years of data and found that financials, as bad as they are now, are in good shape to rebound.
He said he looked at six other periods in the last 40 years when high grade credit spreads spiked. "In each instance, that was a time of recession or credit crisis, but it also marked the bottom in financial equities," he said on "Closing Bell."
"When we look back in history, financial earnings rarely suffered two years in a row, and the reason for that is it's very easy for the financial industry to resize its business model. Unlike a nickel maker or turbine engine maker where, if there's excess capacity globally, it takes years to get rid of. We've just seen this in just a matter of months," said Lee.
"Liquidity and assets sales have really shrunk the capital base of the financial industry almost overnight. In the meantime, the demand for capital remains high so the survivors have really good margins to work with. So...it takes a very short time for the industry to right size its capital base," he said.
Interesting is that CNBC's Bob Pisani (check out his Trader Talk blog) reports that traders are increasingly optimistic that financial stocks will soon begin to attract buyers. His sources tell him they see this trend taking shape in January and that the time to buy could be in the third week of the month. That is when some of the big financial companies report earnings and comment on the first quarter outlook. Those comments could be negative, taking stocks lower and making them more attractive. The pitfalls, of course, could be that there are more credit time bombs or that the sick housing industry takes an even bigger toll on banks and the economy.
Earnings reports are due from three brokers next week. Goldman Sachs reports Tuesday before the bell; Morgan Stanley reports Wednesday before the bell, and Bear Stearns reports Thursday before the bell. They all will be watched closely for writedowns, future writedowns or other lingering impact of the credit crunch. Lehman Brothers reported this past week. Its earnings fell 11 percent to $886 million but it beat analysts estimates.
Other earnings reports of note in the week ahead include electronics retailers Best Buy (Tuesday) and Circuit City (Thursday), both important windows on holiday shopping. (Speaking of holiday shopping, CNBC's Holiday Central survey is released Monday morning, and will give a good look at consumer attitudes toward the economy and spending this holiday season.)
Adobe reports Monday, Darden Restaurants, Hovnanian and Palm report Tuesday, and General Mills and Nike report Wednesday. Oracle also reports Wednesday. On Thursday, Conagra, Fed Ex and American Greetings report, as does Research in Motion. Walgreen reports Friday.
Fed Ex says by the way that Monday is projected to be the busiest day in its history with 11.3 million shipments expected to move through its network. That is four million more packages that it moves on an average day.
The Fed Monday conducts its first $20 billion auction of new term loans under the plan it announced this past week with four other central banks to ease liquidity and credit concerns. The second auction is Thursday.
"If the Monday auction goes well, that'll be a good thing," said CNBC's Rick Santelli. "They could always ramp it up and add more auctions. If they find this helps grease some of those particular gears that aren't turning, it will be a good thing. They will at least have found an interim medicine that will fight the infection better than anything they've tried."
Santelli says the Fed operation could be critical to year end rollover of some troubled credit positions.
"You don't want to have a couple hundred billion in financing that needs to roll over from 2007 into 2008 running into any problems," he said.
In addition to the Fed action, there's a big focus on housing in the week ahead. First on the data front, the, the National Association of Home Builders sentiment survey is released Monday at 1 p.m. On Tuesday, housing starts and building permits for November are released at 8:30 a.m.
The Federal Reserve Board also tackles mortgages. In an unprecedented move, it will actually meet in an open session at 10 a.m. Tuesday to discuss proposed amendments to the Truth in Lending Act and the Home Ownership and Equity Protection Act.
On Monday, Treasury Secretary Henry Paulson begins a road tour on the Administration's plan to fend off foreclosures for some subprime mortgage holders.
Other economic news includes the Empire State Manufacturers survey, to be released at 8:30 a.m. Monday. Final third quarter GDP is reported Thursday morning at 8:30 a.m., and leading indicators for November are due at 10 a.m. that day.
The Philadelphia Fed survey is released Thursday at noon. Personal income and consumption spending is released at 8:30 a.m. Friday. University of Michigan consumer sentiment is also reported that day.
President Bush speaks on the economy Monday in Fredericksburg, Va.
Crude oil rose $2.99 per barrel, or 3.4 percent, to $91.27 in the past week. Gasoline rose 3.2 percent to $2.3417 per gallon.
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