Better Times Ahead for Financials , Citigroup?

A rapid contraction in the TED spread is signaling that the distress in the credit markets is easing. Is it time to turn bullish, or at least less negative?

.....the TED spread has quickly become one of the main indicators investors look to as a gauge of stress in the credit markets. While the indicator rose to historically high levels as 2007 came to a close, since the start of '08, the TED spread has been in a rapid descent, indicating that stress in the credit markets is showing signs of improvement. Today the TED spread fell to its lowest level since August 13th. Bespoke Investment Group

Unfortunately the TED spread is not an infallible forecasting tool, but might signal that we are on the path to healing what ails us. There has been much hand wringing over the Fed's pace here, and perhaps their foot dragging will ultimately cause more pain than was necessary had they moved earlier.

Still, hedge fund managers should at least entertain the notion of increasing their net exposure, even if it only accomplished by covering shorts, and lowering gross. Bearish sentiment, oversold stochastics and mutual fund redemptions would indicate that much of the pessimism is priced in; could the Barrons Roundtable have been any more bearish? Doug Kass did not waste any time, and covered his financial shorts last week:

On Thursday and Friday, I covered all of my longstanding shorts in the financial sector. That includes positions in brokerages, banks, mortgage originators and mortgage insurers.

Last week, I described the most difficult issue that investors face today: To what degree have market prices discounted the emerging fundamental weakness? The Street.com

Too, we had floated the thought a few weeks ago that the probable cut in Citigroup's dividend might be an inflection point of sorts, and a favorable reaction from Vikram Pandit's Town hall meeting tomorrow might confirm that the 52-week low in Citigroup was put in last week. Will it hold?

One of the few winners in the Citigroup sweepstakes has been Meredith Whitney of CIBC, who got ahead of several influential analysts in calling for a dividend cut and other measures that she thought needed to be taken.

Goldman’s William Tanona and others piled on in a classic capitulation, and even the Chinese are reticent to fork over additional capital to the company here. Will the Chinese regret the move a year from now?

Suggesting that the worst was over provoked shouts of derision from the people I spoke with and IM’ed at the end of last week. Perhaps that is another sign than an all out rout, from these levels, will be averted.

We took the New York Times to task for floating silly rumors about Bear Stearns in September, and tried to warm up to Merill in early November. Perhaps soon we can circle back to our IM list and give them an earful too. Heated debates are taking place, but shorts seem dug in and unwilling to budge.

Papa Bear Kass is often early, but usually right. While a move to new highs is out of the question, six months of bloodletting has given sellers ample time to get out of harms way. The stampede out of the financials after the world discovered Level 3 assets was a big step in the cleansing process, and ultimate washout.

Today we will tempt fate, and throw our hat in the ring with Doug Kass. Hopefully he won’t mind a little company. Perhaps we have not seen THE bottom, but pressing a basket of financials short here is not very appealing.

Forget MacWorld, we want to hear what Vikram has to say.

LIBOR, TED Spread, and Fed Funds
Bespoke Investment Group

Kass Katch: Buy the Financials. Yes, Buy
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Positions

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