UPDATE 1-Seabreeze's Kass: Bank stocks "priced to perfection"

(Adds comments, quotes on financials)

By Jennifer Ablan

NEW YORK, May 7 (Reuters) - Hedge fund manager Doug Kass said he is selectively shorting U.S. financial stocks, which have more than doubled since bottoming in early March, on the belief that they have been "priced to perfection" ahead of the banks' stress test results later on Thursday.

"From my perch, investors should sober up and reduce their holdings in financials now," Kass said in a note to clients. "Financial stocks are now priced to perfection."

The KBW Bank Index of 24 large lenders, including 14 that are subject to the stress tests, jumped 25.8 percent in the first three days of this week and had more than doubled since bottoming on March 6.

However, it was down more than 5.2 percent on Thursday afternoon, awaiting the release of so-called bank stress-test results that are expected to force some banks to raise billions of dollars in capital. For full story, see [ID:nN07333426]

In a follow-up interview with Reuters, Kass said: "I am legging into some shorts -- selectively." Kass is founder and president of Seabreeze Partners Management.

In a short sale, investors borrow shares and sell them, betting that the stock price will fall. The goal is to buy the shares back at a lower price, allowing the investor to return the shares to the broker while taking a profit on the spread between the original sale price and the cost of buying the shares back.

Kass argued that the overshoot to the downside through early March has now morphed into a frenzied buying stampede and "pricing disequilibrium" that is ignoring several factors.