The idea that financials are close to a turning point has been percolating for several weeks. But word that Citigroup could take a massive write-down when it releases earnings tomorrow has added fuel to the theory the group may be closing in on a bottom.
This comes on top of reports Friday that Merrill Lynch couldtake a big write-down of $12 billion or more when it reports this week.
CNBC's Charlie Gasparino is reporting that Citi may take a write-down of as much as $24 billion when it reports earnings tomorrow. Some traders see big write-downs from banks as a house cleaning operation that will restore the industry's health.
Gasparino also reports that Citi's new CEO Vikram Pandit will announce his plan to fix Citgroup after its earnings release tomorrow. In a town hall meeting with employees, Pandit is expected to unveil a plan that could include asset sales and potentially lead to job cuts of up to 24,000 people over the course of the next year.
Citi stock was up just slightly and the overall S&P financial sector is fractionally higher. One trader said the Street is all over the map with estimates for Citi's writedown, starting at about $10 billion. "You can drive a truck through this estimate range," said the trader.
He also said there's many investors who are still spooked by the subprime tsunami. "They're not convinced that it''s over," he said. The blood letting in the the financial group since last summer has been particularly painful, and this week has been seen as important because of the earnings reports due from the industry.
Bear turns Bullish, for now
Seabreeze Partners' Doug Kass, who seldom sides with the bull camp, says the financials are making him a lot more bullish today than he has been. He said on "The Call" today:
"I turned much more constructive this morning, and the real questions investors have to ask themselves is to what degree have market prices discounted the emerging fundamental weakness?"
"I think we're moving in the right direction for the first time, coincident with the recent drop in share prices. If you do discounted cash flow or earnings models, the market is now very cheap," he said. "To me, it's not IBM. It's the financials which have previously stood at the epicenter of all that's bad with the world economies that has increased my bullishness."
Kass, in a note this morning, said he covered all of his long-standing shorts in the financial sector, including brokers, banks and mortgage lenders and mortgage insurers.
"I don't think the ride's going to be smooth but I think it's going to profitable."
Reasons Kass now likes financials:
Permanent capital being replenished
Seized up credit markets aren't permanent
Credit write-downs should peak Q4 - 2007 writedowns could total $135-140 billion, less than $50 billion for 2008
Weak CEOs have been removed at big firms
Financials should add a few points to S&P earnings
Banking industry franchises still intact, principle activities still robust
Recessions and Lows
Whether you think there's a recession coming or not, UBS strategist David Bianco's comments about stock prices and earnings in times of recession are interesting.
He says that in the last five recessions, the S&P gained 22 percent on average by the time earnings had bottomed. He points to recessions in 1970, 1974, 1992, 1991, and 2001.
If current bearish forecasts are right, he says the biggest decline in earnings per share growth should show up in the second quarter. "As investor psychology shifts form "How bad will recession be?" to "Fed is cutting and pretty soon we will be in economic recovery," stock prices should recover," he wrote.
Bianco also reiterated his 2008 forecast of 1700 for the S&P 500. Bianco says S&P stocks' earnings per share will show resilience because of exposure to stronger foreign economies.
Today's move up in stocks coincides with more than a few analysts and investors looking for the market's lows, and the financials are a big part of that theme. See what Bob Pisani has to say today in his Trader Talk blog.
Questions? Comments? marketinsider@cnbc.com