Bear Stearns Upgrades Financials to Market Weight form Underweight
Bear Stearns’ upgrade of the financials is based on several factors including:
1) stock prices now reflect likely write-downs and weaker trend-line earnings
2) increased clarity surrounding write-downs
3) expectations beginning to reflect realistic outcomes
4) the recapitalization process is a positive sign.
That being said, Bear Stearns does not recommend an overweight position because they believe the credit environment continues to contain significant uncertainties.
While I respect the opinions of the professionals at Bear and Stearns, I am just not ready to jump into financials with both feet quite yet. In particular, I am not sure that point #2 above highlighting “increased clarity” and the last paragraph highlighting “significant uncertainties” are not contradictory.
The following chart of the S&P 500 sector returns shows that investors have turned ultra-defensive. This defensive positioning can be identified by the superior performance of the traditionally defensive utilities and materials sectors (Orange and Blue lines). Where are you positioned right now?