Market Summary – August 12, 2008 – Financial Sectors Remain in Trouble

Financial stocks turned back down on renewed concerns on more problems with banks and other financial institutions. The rise in the financial stocks from July 15th till now appears to be in jeopardy as liquidity and additional losses are once again front and center.

While others were calling buys on the financial’s back on July 15th we remained very cautious on any financial sector stock. All bank and financial institution stocks remain dangerous. They are great for day traders, but for anything else at this time is out of the question. Just too much risk.

Some examples:

  

  

   

The individual stocks shown above say to me that their short term pattern has been broken and the path of least resistance is down. The financial sector ETF (XLF) tells a different story.

 (XLF)

The XLF chart says that a possible bounce up from support may be in the cards. But, with many stocks in this sector taken a beating today and having broken to the down side I am cautious on any long positions in the XLF. If I see the XLF fall below $21.00 I will short this index.

Investors keep thinking that the financial crisis is in the rear view mirror. But remember what it says on those mirrors… “objects may be closer than they appear“. And investors are still getting whacked in the side by the continuing crisis unfolding in the banks and other institutions.

“Mr. Mortgage” reported today that foreclosures in California have reached another ominous figure. Banks have taken back $12.5 billion in loans and that figure is an increase of 25% from the month before. Also today we got news from Bloomberg that one third of homes purchased in the last five years are now worth less than their mortgages.

[...]Second-quarter home prices fell 9.9 percent from a year earlier, giving 29 percent of owners negative equity, said Zillow, the Seattle-based service that offers values for more than 80 million homes.

For those who bought at the 2006 peak of the housing market, 45 percent are now underwater, Zillow said.

Negative equity and declining prices are making it difficult for homeowners to sell property for a profit. Almost one-quarter of U.S. homes sold in the past year were for a loss, Zillow said. That contributes to the foreclosure rate because some homeowners can’t absorb the loss and end up surrendering their homes to the bank that holds the mortgage, said Stan Humphries, Zillow’s vice president of data and analytics.[...]

The outlook for Goldman Sachs (GS) was lowered today by Deutsche Bank and the famous bank analyst Meredith Whitney of Oppenheimer (famous for she was one of the first Wall Street analysts calling for the problems in the financial sector). The analysts have lowered Goldman Sachs earnings expectations.

So the stimulus checks are just about all spent and the Government (taxpayer) handout of money to every American has come and now gone. In its wake we had a spike in retail sales (that is what they call it, we say it was nothing more than a bump in road), a temporary euphoria on part of the media (even more euphoric than normal), and now we have an even bigger federal deficit…

WASHINGTON (MarketWatch) – Boosted by payments for failed banks and stimulus checks for individuals, the federal budget deficit widened to $102.8 billion in July from $36.4 billion a year ago, the Treasury Department reported Tuesday. The deficit was close to the $102 billion expected by the nonpartisan Congressional Budget Office. Through the first 10 months of the fiscal year, the budget deficit rose to $371.4 billion, more than twice as big as the deficit last year. For the first 10 months, receipts are down 1% and outlays are up 8.5%.[...]

Bloomberg also ran a story today that losses at banks will top $500 Billion. We still hold the view that the losses will be at least double that by time this is all over. And some other trustworthy economists have the total losses near $3 Trillion when this is all over with. See the article here on Bloomberg.

And today Citigroup (C) raised $3 Billion by selling 5 year notes at a yield of 337.5 Basis Points over Treasuries. This shows that risk is increasing with respect to these bond offerings. The financial crisis continues to grow regardless of what the media will tell you.

And on the Crude Oil situation I direct you to an excellent article my friend Frank Barbera wrote tonight on Financial Sense. See article HERE.

Good night and see you in the morning.

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Tagged as: Banks, Citigroup, Crude Oil, Foreclosures, Lehman, Wachovia