Bearish on Banks

The anxiety about mortgage problems that hit the markets in August was based largely on rumor and fear of the unknown. With major banks now reporting their 3Q earnings, the previously unknown has become distressingly well-known. So far, the facts are not proving to be very helpful. Earlier this week Citicorp (C) reported a 57% plunge in earnings. Today Bank of America (BAC) surprised analysts by announcing a 32% drop in 3Q profits. Both stocks plunged.

Several major banks are working together on a plan to set up a special fund that will buy some of the illiquid debt securities that are distressing the financial markets. The as-yet-unnamed Entity is being greeted with considerable skepticism by traders, with many people interpreting the whole idea as a sign of panic by top banking executives. We suspect the idea will be dropped soon as the details of implementing it become more and more problematic. That will leave the bankers in a difficult position, which is why the financial services sector is again the weakest link in the stock market.

At the other end of the scale, emerging markets funds remained in a frenzy this week, thanks to a falling dollar and rising commodity prices - crude oil moved above $89 today. Energy, materials and technology are again providing leadership for the stock market, but negative momentum in the large-cap financial services and consumer discretionary sectors is holding back the index benchmarks. If you avoid those two sectors the stock market is actually in pretty good shape right now.