By Bruce Zaro 

I get asked quite frequently whether I think the banks and other financials are worth buying, a contrarian notion I would usually like. I like to see signs of buyer support emerge rather than guessing at the exact low and running the risk of catching the proverbial "falling knife." 

So far, financials of all types have shown few signs of life and they are still making an oversized number of new 52 week lows as compared to new 52 week highs. On 12/31/07, for example, the financials had 16 new lows, the real estate sector had 22 new lows and the banking sector had 42 new lows - whereas each sector had just 2 new highs. At first blush, this could have been taken as either year-end tax selling or classic signs of a washout.

I would say it more simply, however: there's no visible reason to dip the toes in yet.

Fundamentally, there is good reason to believe banks will eventually stand as great buys.  Since there is virtually no market for the structured debt products on their books at the moment, they literally have to guess at market prices for those assets in order to come up with the write-downs. They may have to go through a couple rounds of this, but we here are convinced they will end up over-estimating those losses.

Should that occur, it could set up a situation similar to what happened in the aftermath of the savings and loan debacle in the early 1990's, when banks posted monster earnings for years on the backs of huge loss carry-forwards.

All that said, there's no sign of life yet.  Updating those new high/new low figures last Friday: those same three sectors saw just 2 new highs combined versus 53 new lows. Don't be a hero  and try to be the person who nails the bottom; wait for signs of true demand to show up in these groups, then perhaps take a look at XLF (banks) IYR (REIT) as possible ways to play this (but check out Chip Hanlon's recent article on corporate real estate first!).  And don't rush it; if the chance to bottom-fish financials doesn't come about for weeks or even months, so be it.