Value managers and contrarian analysts long derided as permanent bears have been poking their heads out of the woods to bring some early Christmas cheer to delegates assembled at the CFA Institute’s European Conference in Amstedam.

James Montier, global strategist at SocGen, who likes to swim with sharks in his spare time, opened the conference on Tuesday by saying that he was more optimistic about equities than he had been for a long time, with the UK and European markets approaching bargain basement prices.

But on day two, Matt King, managing director, credit products strategy at Citigroup, rained all over this parade. “I have a message for equity investors,” he said. “It’s worse than you think!”

He argued that next year will be just as miserable as 2008, if not more so, for the majority of investors, as European bank deleveraging is only a third of the way through. “For credit investors it’s not as bad as we are still earning carry, but equity investors continue to amaze me with their over-optimism,” he said.

Citigroup’s equity strategists are forecasting 40 to 50 percent falls in EPS, and King foresees a weak recovery, more like that of the 1930s, as defaults have such a long way to go.

“Things have only stabilised because everything is on central bank life support - there has been no improvement in the underlying fundamentals,” he said. Because European banks are still unable to lend - due to regulation requiring further deleveraging - companies won’t be able to refinance, and will have to do everything they can to pay down their debt, or face liquidation, like UK retailer Woolworth’s. This will lead to cuts in capex and headcount, creating a strongly deflationary environment, spelling bad news for an equity market recovery.

Merry Christmas everyone.

Financial markets might be in distress and stocks are falling through the floor, but according to James Montier, global strategist at Societe Generale, we are not in the final stage of bubble burst yet. For one thing, the Financial Times is still too big.

At a fund managers conference in London today, Montier — a renowned bear — noted a thesis by economists Hyman Minsky and Charles Kindleberger that bubbles go through five stages — displacement, credit creation, euphoria, critical stage/financial distress and revulsion.

Currently, he says, financial markets are going through the critical/distress stage but we are not in revulsion yet.

“In revulsion, the Financial Times will be three pages long and we will all be ashamed to be working in finance. Stocks will be unambiguously cheap,” he told a group of financial professionals.

During a briefing in the London office of Societe Generale this week, Alain Bokobza, head of European Equity and Cross Asset strategy, handed out a booklet containing series of charts and graphs to explain the bank’s latest multi asset portfolio for the fourth quarter.

As he explained the outlook for the UK economy, a chart on UK growth was discreetly missing from the booklet.

“There’s no chart. It’s too gloomy to print it,” Bokobza told the participants.

Societe Generale sees inflation shooting below the Bank of England’s target of 2 percent over the next two years and has a bullish call on UK stocks as it predicts benchmark interest rates to fall to 3.5 percent in a year’s time from the current 5.0 percent.

More stress on its balance sheets is just about the last thing that the banking sector needs. The subprime mortgage crisis has already battered banks, leading to huge losses, scrambles for funding and free-falling banking shares. The S&P index of financial stocks has lost more than 30 percent so far this year. At its worst, the index plunged around 55 percent between a high in May last year and a low in June this year.

Now, after a brief respite, comes more bad news. First, hedge funds still seem to be wedded to betting on further losses. Laurence Fletcher, who writes about hedge funds here at Reuters, notes that more than 6 percent of British banks’ equity is on loan to short sellers.

More worrying yet for banks, however, may be their exposure to embattled Fannie Mae and Freddie Mac. In a report, Societe Generale economists estimate that U.S. commercial banks hold about $1 trillion in Fannie and Freddie debt. That amounts to a whopping 9 percent of the commercial banks’ balance sheets.

Then again, maybe the danger to the banks will simply add pressure on the U.S. government for make sure Fannie and Freddie don’t fail.

It doesn’t seem much to cheer about but Societe Generale investors breathed a sigh of relief when second-quarter net profit only fell 63 percent.

The investment banking unit may have taken a 1.2 billion euro hit but higher profits from its international retail banking and consumer credit businesses offset the damage and kept the group in the black.

In today’s doom-laden markets that was something to celebrate - and the shares jumped more than 6 percent.

It has been the year from hell for the venerable French bank, still in the shadow of the world’s worst rogue trader scandal and struggling - like its peers - with the global credit crunch.

In January, it revealed 4.9 billion euros of losses following rogue deals by junior trade Jerome Kerviel, forcing a 5.5 billion euros rights issue and making SocGen a takeover target in the eyes of many.

Magistrates are still studying what went wrong and who knew what about the Kerviel

affair. But SocGen may be back from the brink.

SocGen CEO Frederic Oudea, in any case, doesn’t favour a merger. ”In this environment, throwing yourselves into big deals is very risky,” he told reporters.

And echoing comments from HSBC this week, he argued the universal banking model remains viable and will emerge as the “winner” from the current credit crisis.

Attention turns next to BNP Paribas, France’s biggest listed bank, which reports second-quarter earnings on Aug. 6.

(Reuters photos: SocGen branch in Paris; Jerome Kerviel)