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U.S. financial stocks looking cheap

Value investors might be tempted by U.S. financial stocks now that they're trading close to book value.

(Photo: Getty Images)

Last week, Wall Street recorded its 6th straight week of losses. Financial stocks were the worse-performing sector, with the Financial Select Sector SPDR ETF showing a decline of 12% since mid-February.


Renewed weakness in the housing market is fanning fears that insufficient provisions have been set aside for the banks’ mortgage portfolios. Then there is the euro area debt crisis, slower growth in the economy, lawsuits over foreclosure practices, and impending adjustments to capital-reserve requirements.


But some analysts are saying value investors will be tempted by S&P 500 financials trading just a smidgen over book value. That’s not far from where they finished 2008, several months after the fall of Lehman Brothers and Washington Mutual.  


Like tech stocks after the dotcom bubble, it may take a while for financial stocks to regain their luster. Then again, financial institutions play a critical role in the economy and policymakers need them to be firing on all cylinders to get the economy moving again. So the convalescing period could be shorter.


In addition, housing and the economy should get a lift from the plunge in 10-year U.S. government bond yields to 3%, and, if the economy needs it, a new round of quantitative easing from the Federal Reserve. Plus the uncertainties related to lawsuits and capital-reserve requirements should be cleared up later in 2011.


I’m still biding my time for now. But if there is any panic selling due to some event, such as a sovereign debt default in the eurozone, that could be a time to jump in.