Louise Yamada: financials going lower

In this weeks Barron’s, Louise Yamada writes that financials in the U.S. have not fallen nearly enough in respect to their meteoric rise in the U.S. indices. She predicts further pain in the sector to where they represent less than a double-digit percentage of the S&P 500. I am certainly bearish on financials and see the drip drip of credit writedowns as the mechanism to much lower prices in the sector.

Don’t bank on a quick turnaround for the financial-services sector.

HOW LOW CAN THEY GO? Ever since the credit crisis began last summer, financial-services stocks have been spiraling down. Just last week, Citigroup plunged to a 10-year low as Goldman Sachs downgraded the stock to Sell.

Two Tops Too Many: The industry’s stocks have formed a “double top” in the past 10 years — often an ominous sign. Plus, the highs of last year were higher than those before the woes of 1998. Warns Louise Yamada: “The bigger the top, the bigger the drop.”

Bottom fishers might want to reel in their lines: Louise Yamada, a top market technician, warns that the sector’s rout is “far from over.” Based on her reading of stock charts, some big names could fall another 40% or 50%. Citigroup (ticker: C), now about 18, could drop to 10 before the carnage is over, Yamada says.

She adds there’s a “good shot” financial stocks will fall from 16% of the Standard & Poor’s 500 index today to the single digits, a level not seen since 1980. As recently as last year, financials made up 22% of the index.

Though bulls have argued that the woes of the financials may prove relatively short-lived, as in 1998, Yamada says those comparisons are specious. “There’s nothing to suggest financials have had this kind of structural decline probably since the 1920s or ’30s,” she tells Barron’s.

Yamada’s sharp calls have earned her a strong following over the past three decades. She headed up technical analysis at Smith Barney for 25 years before starting her own firm, Louise Yamada Technical Research Advisors, in 2005.

Credit Writedowns’ comment: The graphs here point out that the financial sector the U.S. in the aggregate is still well above levels of the late 1990s. I believe that the deleveraging process we are experiencing will wipe away gains from this decade and bring us to levels from the mid-1990s for financial stocks.

The graphs do reinforce the view that Wall Street is underestimating the impact that this credit unwind period will have on the financial sector. If one thinks about the NASDAQ bubble in the late 1990s, where prices tumbled from over 5000 to 1100 from March 2000 to October 2002, many of the stocks that led that bubble have not seen anywhere near their highs for 8 years. Others have gone bankrupt. Why is the same not expected for financials today?

The reporting season kicks off fairly shortly, with larger financials like Merrill and Citigroup rumored to have massive writedowns in the offing. I anticipate another round of bloodletting. When the reporting season is done in August, let’s take a look see and re-visit this thesis. For now, buyer beware.

Why the Rout in Financials Isn’t Over, Barron’s, 30 Jun 2008

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