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Bank stocks look cheap, but buyers remain cautious PDF Print E-mail
Sunday, 20 July 2008

AP, NEW YORK -- Merrill Lynch & Co. Chief Executive John Thain is making a pitch to Wall Street: Buy the brokerage's shares while they're still cheap. But investors don't seem ready to listen.

In spite of a nearly 400-point surge in the Dow Jones industrials this past week, the market is expected to remain on edge for the foreseeable future.

The reasons are varied: The economy is stumbling, the price of oil is still high and the housing slump that triggered the year-old credit crisis is not yet abating.
The market was clearly relieved by the upbeat financial sector earnings reports from Citigroup Inc., JPMorgan Chase & Co. this past week. But while the old rule on the Street is that financials tend to be the group that leads the broader market higher in any rebound, investors are taking a cautious approach, waiting for more positive signs that the worst of the credit crisis is behind financial companies.
Thain, like many of his colleagues, believes badly beaten financials represent opportunity.
''At what point do buyers realize that stock prices have gone too low and there's a real buy opportunity?'' Thain said in an interview after Merrill released earnings on Thursday. ''It for sure will happen eventually. Whenever we get these kind of crisis and panic type selling, they always present great buying opportunities for those who can overcome the fear.''
Though bank and brokerage stocks surged earlier in the week on JPMorgan Chase's results and an equally pleasing report from Wells Fargo & Co., investors on Friday took a more conservative stance. A nearly 8 percent surge in Citi's stock on Friday had little influence on the rest of the nation's bank stocks -- the Philadelphia/KBW Bank index of 24 companies edged up by just under 1 percent.
Arthur Hogan, chief market analyst at Jefferies & Co., said the biggest reason investors aren't ready to snap up financials is because of the companies' need for more capital. Global banks and brokerages have written down some $300 billion of bad investments since last year, and have raised just as much by selling stakes to big investors like sovereign wealth funds.
''That's dilutive to the shares, makes them worth less,'' Hogan said. ''Merrill Lynch continues to take charges, and they'll need to raise capital. You don't want to jump into the financial sector until you know how much capital needs to be raised, and that's going to restrain the overall market from moving higher.''
He said Citi's move higher on Friday was in part because the bank not only kept write-downs below expectations, but did not need to raise any new money. Others might not be as fortunate -- on Friday goverment-sponsored mortgage lender Freddie Mac informed regulators it plans to float $5.5 billion of new stock to stave off its financial troubles.
Moreover, a solid move higher on Wall Street is likely to be a ways off because investors' concerns have gone well beyond the hobbled financial sector. This past week the government reported that consumer prices surged 5 percent in the past year, the biggest jump since 1991. Higher expenses for food and fuel caused yet another increase in June, according to the Labor Department.
With consumers struggling with falling home values and the ongoing credit crisis, the Federal Reserve finds itself in a tough spot. Raising interest rates might help fight inflation, but it also could slow the economy even further.
And there's still a great deal of anxiety in the market about consumer spending, with so much money going into Americans' gas tanks -- even though crude oil futures plunged nearly $16 over three days this past week. It's too soon to say that the energy bubble is over, especially since speculative buying has taken crude to previously unthinkable prices this year.
Professional traders believe that all investors will have to wait a bit longer to determine if financial stocks are poised to lead the market higher. The answer might come in the next few weeks as even more financial companies -- along with other major sectors -- continue to post quarterly results.
''The real message is that there really aren't a lot of buyers out there these days,'' Hogan said. ''John Thain will find them once we get a better idea about how much capital is needed to prop up the financials.''

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