Highlighted stocks include Citigroup, Inc. (C), Goldman Sachs Group (GS), WestAmerica Bancorp (WABC), General Electric (GE) and American International Group (AIG).
After yesterday's rally in the financial stocks, you might be wondering if it's finally time to buy. The short answer is "not yet". The long answer is more complicated.
News of an internal memo from Citigroup's (C) CEO, Vikram Pandit, sparked the rally. Pandit proclaimed that the company was both "profitable" so far this year and that it was "the strongest capitalized large U.S. bank".
Adding fuel to the fire was the proposal by Fed Chairman Ben Bernanke to overhaul banking regulations. Traders were also hopeful that a change to mark-to-market rules would be made and the uptick rule would be reinstated.
Financials Are Full of False Hope
Though this sounds like good news, the truth is that we've been there, done that.
Pandit's comments might sound optimistic, but they are really just a broken record.
CEO Alan Schwartz said Bear Stearns would not have any more write-downs 2 months before his firm failed. Lehman Brothers' CEO, Dick Fuld, was defiant until the end. John Thain pounded the desk on Merrill Lynch before being forced into a shotgun merger.
Even the markets are skeptical about Citigroup. Yesterday's 40% jump didn't even push the stock above $1.50, or about the price for a bottle of water. And even with this morning's additional gain, it still costs more to ride the train from my office in downtown Chicago to Wrigley Field than it does to buy a share of C.
Still Waiting On Federal Salvation
The Fed and the Treasury Department continue to evolve their policies. Unfilled key positions at the Treasury Department are certainly not helping, but Bernanke continues to shift his strategy as well.
The reluctance to delve fully into nationalization remains a sticking point, even though U.S. taxpayers are taking a huge risk on C, American International Group (AIG) and many other firms.
Mark-to-market accounting is another sticking point, particularly in terms of how to change it. A House Financial Services Subcommittee will discuss the matter on Thursday.
Then there is the uptick rule, which bars traders from short-selling a stock unless the most recent trade is higher than the previous. Some blame the removal of this rule for causing stocks to plunge. As if that rule was responsible for the gross mismanagement of financial firms, the imprudent lending strategies or the willingness of some people to buy homes they couldn't possibly afford.
Capitalism works by punishing those who make mistakes. If a CEO does not want his stock shorted, there is a simple solution - do a better job of running your company.
What's On Those Balance Sheets?
The biggest issue, however, continues to be that banks don't know what is on their balance sheets. A year after the financial firms supposedly threw in everything but the kitchen sink (anybody remember some of the statements made in response to 2007 fourth-quarter earnings?), they still don't know how many kitchen sinks they own.
Credit cards are only adding to the problems. Though not as big a problem as mortgages, the recession will cause credit card default rates to rise. New fees and higher interest rates are only compounding matters.
This is why Financials has one of the worst ranks of any sector. Earnings estimates continue to be cut across the board as brokerage analysts realize over and over again that they have underestimated just how badly banks and other financial firms are struggling. (During the past 4 weeks, 6 full-year profit projections have been cut for every forecast that has been raised.)
Technical Analysis Doesn't Work Either
Perhaps the biggest short-term risk to the financial stocks, however, is that they have become very difficult to trade. Fundamental analysis doesn't work because their balance sheets are a mess and earnings estimates keep getting slashed.
