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As Bank Stocks Tumble, Pros See Bargains

Financial stocks were falling this morning after J.P. Morgan Chase & Co. (JPM) reported disappointing earnings and the Wall Street Journal reported that Bank of America (BAC) may consider pulling out of some parts of the country. But investors with an appetite for risk — and a longer time horizon — may find some values in the beaten-down sector.

While the broader market dipped today on the latest round of European downgrade rumors, financial stocks were hit particularly hard. J.P. Morgan was down about 3.7% by midmorning, Bank of America was down over 3%, and Citigroup was down a little over 2%. This follows a tough year for the financial sector, which fell 18% in 2011, compared to a 2% gain for the S&P 500 and an 8.4% gain for the Dow. Over that period, Bank of America fell 58%, Goldman Sachs has fallen 45%, and J.P. Morgan lost 19.7%.

For investors with at least a three to five year time horizon, this could be a good time to buy into the sector, says Tommy Williams, the president of Williams Financial Advisors. While he says these stocks may not have hit a bottom yet, “things can’t get too much worse for the sector and they can get a heck of a lot better” with “just a little whiff of optimism.” Indeed, Jeffrey Kleintop, the chief market strategist for LPL Financial, says that any improvement in consumer and investor confidence should boost bank shares again – but investors should expect plenty of volatility.

Some pros say the sector remains too risky, given the risk of contagion in Europe and the continued trouble in the housing market and broader economy at home. “There are too many unknowns to feel comfortable reentering the financial sector, despite how deeply discounted they are,” says Kevin Mahn, the chief investment officer at Hennion & Walsh. Mahn says his firm hasn’t had direct exposure to financial stocks since at least 2008, and doesn’t plan to add any at this point.

Mark Coffelt, the president of Empiric Advisors and portfolio manager of the Empiric Core Equity Fund (EMCAX), adds that investors are favoring high-quality companies with consistent earnings – and big banks don’t make that cut. “There’s no doubt that the prices are a lot less than they’ve been, but the value is so difficult to get a handle on,” Coffelt says.

Still, LPL Financial projects that long-term interest rates will start to rise this year — even as the Fed holds short-term rates steady. This could help increase revenue for banks since the difference between the interest they can earn on longer-term loans and the interest they have to pay on short-term savings products would grow, Kleintop says. For now, however, the firm is still underweight the financial sector.

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    • Banks are not out of the woods yet. Peak losses are yet to come. In a deflationary crash, even though FED makes credit easier, it is hard to turn the boat around due to the following reasons:

      1. Lenders (banks) do not want to lend because they think they may not get their money back.

      2. Borrowers do not want to borrow because they think they may not be able to pay it back.

      Read Conquer the Crash to understand why we are having deflationary pressures despite trillions of newly minted dollars.

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