Doug Kass Warned Members About Bank Stocks Days Before Their Big Selloff

Banks didn’t sucker-punch the market. Real Money’s Kass, Stephen ‘Sarge’ Guilfoyle and TheStreet Smarts’ Todd Campbell waved red flags about the sector.

Who knew that bank stocks would sink more than 7% on Thursday?

The move lower was actually well telegraphed by several experts at TheStreet.

Hedge fund manager Doug Kass, author of Real Money Pro’s Daily Diary, and Stephen “Sarge” Guilfoyle, who writes the popular Market Recon column on Real Money, for example, earlier in the week gave warnings about the looming risks. And so did the TheStreet Smarts’ Todd Campbell.

Let’s unpack what happened.

“Late last week we essentially sold out of our long bank holdings — based on our growing concerns regarding the commercial real estate space and other credit fears, rising deposit (funding) betas and the likely economic consequences of the Fed’s problems associated with taming inflation,” Kass wrote in his Daily Diary post, “Banks Bust,” at 7:30 a.m. ET on Wednesday.

Kass also warned of the “bearish” messages coming out of JPMorgan and others in the financial-services sector in conferences earlier in the week. And he listed numerous reasons to be wary of the financial-services sector: deposits data, higher rates lasting longer than expected, commercial real estate woes, the lack of monetary and fiscal policy relief that were seen during the Great Recession, and “zombie companies” he sees as a “disaster about to happen.”

By Thursday’s close, the SPDR S&P Bank ETF  (KBE) – Get Free Report had fallen 7.28% to $42.66. It was down more than 10% from just five days earlier. The ETF for regional banks, the SPDR S&P Regional Banking ETF  (KRE) – Get Free Report, was down nearly 4.7%. The Financial Select Sector SPDR Fund  (XLF) – Get Free Report, meanwhile, was down more than 4% on the close.

Banks, explained Guilfoyle early Wednesday morning, “don’t do so well during periods of economic recession as demand for credit dries up as business and households cut back on spending plans.” He also noted that as the mortgage business ebbs, banks also feel the crunch.

“I did not exit my bank stocks on Tuesday, but I did reduce my exposure to the space by close to 50%,” said Guilfoyle the day before the bloodletting.

Campbell on Wednesday noted in his TheStreet Smarts column, presciently titled “Is It Time To Sell Bank Stocks?” that higher interest rates could drag on banks, as could lowering demand for loans as the economy putters.

“The risk GDP falls again because of rising interest rates is increasing,” wrote Campbell. “If a dip in economic activity causes layoffs, cash-strapped borrowers will likely mean fewer loans and higher default rates. Since banks are likely to pay higher rates for deposits because of sky-high money market and Treasury yields, banks may face a reckoning as revenue and profit shrink.”

By Thursday’s close individual banks fell with their respective ETFs, as Bank of America,  (BAC) – Get Free Report Wells Fargo  (WFC) – Get Free Report and Citizens Financial  (CFG) – Get Free Report all plummeted by around 6%.

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