Fear Strikes Financials, Again

Story Highlights:

• Financials companies have seen their stocks battered during the downturn. This past week was especially brutal.
• Despite government efforts to help, concerns over Financials' health have been renewed amid worries over commercial mortgage-backed securities and the broader economy.
• It's no small coincidence that Financials' recent dive has occurred around the same time as changes in TARP. Inconsistent government actions and messages heighten uncertainties over Financials' short-term outlook.
• The financial landscape has improved markedly in recent weeks, but confidence remains shaken and uncertainty pervasive. At this point, a wait and see attitude continues to prevail.

(Editor's Note: MarketMinder does NOT recommend individual securities; the below is simply an example of a broader theme we wish to highlight.)

_______________________________________________________________

Financials companies have been at the center of this market and economic storm and not surprisingly, their stocks have been battered. This past week was especially brutal—the S&P 500 index's Financials sector slid 10% on Thursday, before recovering somewhat late Friday. Last year, Financials stocks represented around 25% of the S&P 500. Now they are near 12%.*

Despite government efforts to shore up Financials with a variety of measures, concerns over their health have intensified of late amid worries over commercial mortgage-backed securities, consumer debt, the broader economy—you name it. Specifically, Citigroup has come under pressure after it recently announced plans to bring an estimated $17.4 billion worth of murky debt-based securitized assets onto its balance sheet.

Despite Citigroup's claims that it remains well capitalized, investors fearful of Citigroup's ability to operate with a weakened balance sheet (among other worries) responded by driving Citi's stock down to below $4 dollars a share as of last Friday's close—a 60% drop over the course of the week. Now, Citigroup is said to be considering options including selling all or parts of the company, merging with a rival, or maybe preparing itself for another good old-fashioned government bailout.

Though some worry Citigroup may "pull a Lehman" (failure without a government bailout), we think it's unlikely Citigroup will be allowed to fail. If anything has been consistent in this financial crisis, it's been the Fed and Treasury Secretary Paulson's actions to protect the interests of commercial banks. If Citi is in trouble, there's little reason to believe nothing will be done, though not impossible.

It's no small coincidence Financials' recent dive occurred around the same time Paulson announced the government would no longer purchase bad mortgage-backed assets through the Troubled Asset Relief Program (TARP) and a suspension of further TARP spending will take place. Both actions heighten uncertainties over Financials' short-term outlook, and the next administration may not formalize plans for TARP for some time.

And it's not just Citi. It's worth noting that Financials stocks as a group has plunged lately—even though most big banks appear to be in okay capital positions. To wit, Bank of America bought an additional 8.4% stake in China Construction Bank Corp. and JP Morgan made a bid for Chevy Chase Bank.

The financial landscape has improved markedly in recent weeks, but confidence remains shaken and uncertainty pervasive. As previously mentioned, markets don't seem to be reacting to fundamentals; fear and other pressures are not untypical at bear market finales. When human emotions are severely tested, sentiment can rapidly shift from one side to the other. But at this point, a wait and see attitude continues to prevail.

* Source: Bloomberg, 11/19/2008