in step with doug kass - a light at the end of the tunnel (that's not a train!) for c, bac, gs, jpm and others?

kass over at real money wrote something today that smartly illustrates the points i've been trying to make since the first of the year: recent evidence suggests that some of the huge financial writeoffs and writedowns of a variety of credits at our leading financial institutions might have been exaggerated. this could lead to financial WRITEUPS over the next one or two years.

if this supposition is correct, there is a fortune just waiting to be made in the financial sector.

• on page m14 in this weekend's barron's, levered loans are trading at about 88 cents on the dollar. by contrast, the market is expecting a 10% to 15% default rate, a level that has never been seen according to KDP Advisors. in fact, says KDP, "The loan market is trading with a higher default rate than the junk bond market, very bizarre given that leveraged loans are secure debt and are senior to bonds in corporate capital structures." so, levered loans are trading well below fundamentals.
• the same holds true for high-yield bonds, in which the current default rates stand at 1.5%, implied by spreads are 8% defaults, and expected by ratings agencies (like moody's) is only 5%.
• the same holds true for commercial real estate loans, in which the current default rate is 0.3%, implied by CMBX is 8%, and the expected default rate, according to credit professionals relied upon by many, is expected at only 2%.

one could conclude from the above that there is a mistaken pricing of debt that is causing larger-than-necessary financial sector writeoffs, similar to when portfolio insurance kicked in and forced investors to sell stocks during the october 1987 market crash.

if my observations are correct, a mistaken pricing of debt is serving to constrain bank lending, slow the economy and has produced artificially low stock prices (especially of a financial sector-kind) as investors could be overreacting to the huge financial writedowns at some of the world's largest financial institutions.

long c, gs, bac, mbi, jpm and hoping to be long soon on a number of others