Market Flipping Over Financials
Last Update: 23-Jul-08 08:50 ET
Just a short time ago, there was a fear of owning financial stocks. Now there is a fear of not owning them. Tuesday's session made that abundantly clear as the financial sector soared 6.9% with the bulk of that gain coming in the last two hours of trading.
The turn in the financial sector was remarkable. There was a near 11% swing between its low and high points yesterday. What's more is that the rally occurred in the wake of some otherwise bad earnings news out of the sector.
A rally in the face of bad news is typically considered a sign the market believes the worst of the bad news had already been priced into the stocks. The jury remains out on that issue when taking into account the widespread acknowledgment of deteriorating credit quality. However, the absence of new, dilutive capital raising efforts has been the focal point of hope that has spearheaded a massive 31% gain in the financial sector from its low last Tuesday.
It's hard not to respect that type of move. At the same time, though, investors should be careful not to chase it in earnest here.
The financials have rallied on the removal of some clear negatives, namely the fear that Fannie Mae (FNM) and Freddie Mac (FRE) would fail and the belief we would see another round of dilutive capital raising in the sector. These are positive considerations, yet neither changes the fact that earnings prospects for the sector remain encumbered by the deteriorating credit quality and continued stresses in the financial markets.
Rallying on better-than-feared news can take the sector only so far. It is distinctly good news that is needed to sustain the rally.
On a related note, the market is getting good news on the earnings front outside the financial sector. According to Bloomberg data, second quarter earnings, excluding financials, are up 10% (they are down 18%, including financials).
The market is again learning to appreciate the point that there is a real economy still functioning in a growth mode, albeit sluggishly, in spite of the financial mess. Pfizer (PFE), McDonald's (MCD), PepsiCo (PEP), General Dynamics (GD), PF Chang's (PFCB) and WellPoint (WLP) are among the non-financial companies reporting today that surpassed earnings estimates and increased earnings versus the year-ago period.
Retailer Costco (COST), though, issued an earnings warning that drove home the point that this isn't an ideal earnings environment. Still, the market is holding its ground this morning as it eyes yet another drop in oil prices.
Crude futures are currently down 1.4% to $126.57 per barrel with some strengthening in the dollar and a continued unwinding of speculative excess weighing on prices.
The drop in oil prices has unquestionably been a boon for the stock market in the last week, as has the better-than-expected earnings news overall.
The market, frankly, should have traded higher in response to those developments, but don't expect it to be clear sailing from here.
--Patrick J. O'Hare, Briefing.com  |