With More Pain to Come, Don't Be Fooled by Yesterday's Banking Sector Gains

By Mike Caggeso
Associate Editor

Though last week's river of red flowed into the new week causing stock prices to stumble yesterday (Monday), the market received a boost from an unlikely quarter – the banking-and-finance sector.

Aided by a strengthening U.S. dollar and a dip in gold prices – not to mention an extended sell-off that has brought financial stocks down a long way – investors marched into financial stocks, fueling some strong sector gains, including:

• Wells Fargo & Co. (WFC), which rose 1.99%.
• Citigroup Inc. (C), up 1.42%.
• National City Corp. (NCC), up 3.4%.
• And Goldman Sachs Group Inc., (GS) up 1.6%.

However, analysts continue to caution investors to stay away from the banking sector, as the housing market won't rebound much before 2010 and the subprime woes are expected to plague the market throughout 2008. Two of those analysts include Meredith Whitney and Carla Krawiec, CIBC World Markets Inc. analysts whose Nov. 1 research report on Citigroup cutting its dividend or selling assets triggered a 2.6% slide in the Standard & Poor's 500 Index.

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Whitney and Krawiec stepped back into the fray again yesterday, writing to tell investors that the shares of Citigroup, the largest U.S. bank by assets, may slump below $30, as extended declines on write downs will have a "severe impact" on capital ratios, Bloomberg reported. Citi closed at $33.57 yesterday, up 42 cents a share. But it's well below its 52-week high of $57 a share.

"The optics for the group are not good at the moment, but they are poised to get worse," Whitney and Krawiec said in an investor report yesterday. "We expect Tier 1 ratios to drop materially in the fourth quarter."

JPMorgan Chase & Co. (JPM), the third-largest U.S. bank, may have to write down more of its loan portfolio in the fourth quarter. At the end of September, JP Morgan held $40.6 billion in leveraged loans and unfunded commitments, and more may be added "if market conditions worsen," the company said in a statement. If the credit markets continue to tighten, the bank said it would become harder to finance leveraged buyouts – a source of profits for banks and investment banks, and part of the fuel that sent stocks into record territory this summer.

JP Morgan's report arrived on news desks the same day that Bank of America Corp. (BAC) said "market dislocations," including in the market for debt-backed securities, would throw a wet blanket on its fourth-quarter results.

The Associated Press reported that financial institutions have announced that they expect their portfolios have fallen in value in the fourth quarter by some $20 billion. That figure includes an estimated $11 billion write-down from Citigroup and an anticipated $6 billion write-down from Morgan Stanley (MS).

So word to the wise, don't let yesterday's sunshine fool you. You'd be hard-pressed finding an analyst or economist [or even a Wall Street cab driver!] who views the financial sector as a "buy" right now. Better to wait until the end of the storm is near.

News and Related Story Links:

• Money Morning:
  Investors Bolt From Citigroup in Light of Suggested Dividend Cut or Asset Sale

• Bloomberg:
  Citigroup, Large Banks Will Slide Further, CIBC Says

• Associated Press:
  JPMorgan Sees More Credit-Related Losses

• Los Angeles Times:
  Banks warn of quarterly losses

• Money Morning:
  The Week That Was: Team Bernanke and Interest Rates Have U.S. Economy Headed in the Wrong Direction