Paine Webber gives thumbs-down to banks.

Bank stock investors are facing a hard winter, according to Lawrence W. Cohn of Paine-Webber Inc.

"It's frustrating because these stocks look so inexpensive, and yet don't make you any money," he said. "Cheap they may be, but cheap they will probably stay."

The reason, the Wall Street analyst said in an interview this week, is that most market players sense the approaching end of the typical investment cycle in banking and other financial stocks.

Firmly in that frame of mind, investors have mostly dismissed the continued good earnings of the banking industry.

The impressive third-quarter results reported in October could not prevent the American Banker index of the 225 largest bank stocks from sharply underperforming the Dow Jones industrial average.

The index of banks was up a meager 0.07% last month, while the Dow Jones industrial average rose 1.69%. The Standard & Poor's 500 stock index was up about 2.1%.

Last week's rally in the bank stocks, followed by fresh weakness this week, did not surprise Mr. Cohn. Indeed, he expects more such episodes during the next six to nine months.

"Last Friday was a perfect example of the situation that these stocks are in," he said. "After selling off excessively, they staged a rally that was based on a bounce in the bond market.

On Friday, the recently bearish bond market rallied after the benchmark 30-year Treasury bond reached a yield of 8%, considered by some observers a likely level at which the expansion of the economy will ultimately stall.

By Tuesday, however, the price gains for bank stocks as well as bonds had largely evaporated and the yield on the Treasury's 30-year "long" bond was back above 8%.

In afternoon trading on Tuesday, Citicorp was off $1.625 to $46.125, Fleet Financial Group was down $1.375 to $32.875, and SunTrust Banks Inc. was off $1.125 to $49.50.

American Savings of Florida, Miami, slid $3.375 to $16.625 after a proposed acquisition of the thrift fell through.

The downdraft in Tuesday's market was attributed to a report from the National Association of Purchasing Managers that suggested a robust economy and thus implied the Federal Reserve Board will soon raise interest rates again.

Mr. Cohn expects the same thing to happen through the winter and spring. "With the economy moving along at a fairly strong pace, we could see rallies from the 8.25% yield level and then from 8.5%," he said.

"It tends to happen whenever some people feel interest rates have peaked and step back in as buyers of these stocks," he said. "But there are always a lot of false signals and false starts about this turning point, and meanwhile the stocks get chewed up."

Mr. Cohn recommends that clients use any such stock price rallies at this point in the investment cycle to reduce holdings of bank stocks, except for a few selected issues.

He suggests retaining shares of BankAmerica Corp., Bank of New York Co., and Bank of Boston Corp. for valuation and fundamental reasons. And he thinks Midlantic Corp. and Shawmut National Corp. should be kept because they are likely takeover candidates.

"The idea is, sell generic bank stocks, keeping only those you think are so special the market will come to play them even if they don't play the group otherwise," he said.

"But the further along we progress in the cycle, the more the entire [bank stock] group labors," he cautioned, "and the harder it becomes for individual stocks to stand out."

So exactly where are we right now in the bank stock investment cycle?

"That is the $64 question," the PaineWebber analyst said. "The key issue for people in bank stocks is when does the cycle roll over," meaning the point at which interest rates have peaked and economic activity begins to slow.

"It's elusive. The next recession is out there, but we can't quite see it yet," he said. "We move closer each time the Federal Reserve pushes up interest rates."

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