Day of 'reckoning' for banks
Bad news from AmEx and Wachovia should serve as a reminder that it's still a troubling time for many financial stocks.
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| Bank stocks plunged earlier this month on fears of a financial collapse but rallied when banks started reporting better-than-expected results. |
NEW YORK (CNNMoney.com) -- So much for all the good news from the financial sector.
American Express (AXP, Fortune 500) stunned Wall Street Monday night with a significantly smaller profit than expected. CEO Kenneth Chenault told investors that the company was withdrawing its forecast for 2008 because the economy "has weakened significantly."
And Tuesday morning, Wachovia (WB, Fortune 500), the nation's fourth-largest bank, reported a bigger loss than expected. It also slashed its dividend for the second time this year.
Last week, Oppenheimer analyst Meredith Whitney warned about a "reckoning" for Wachovia - at first, it seemed like that day may be here.
It looked like the Wachovia and AmEx news, combined with weak results from several regional banks Tuesday morning, appeared to be put an end to the recent rally in bank stocks. Bank stocks plunged at the opening bell.
But with oil prices falling Tuesday, shares of several banks, including Wachovia, were actually higher in late-morning trading.
Frank Barkocy, director of research with Mendon Capital Advisors, a firm that invests primarily in financial stocks, adds that investors were also heartened by the fact that several banks noted Tuesday that they may not need to raise more capital.
SunTrust said it sold off some shares in long-time investment Coca-Cola during the second quarter but stressed that it won't cut its dividend or sell more stock. And new Wachovia CEO Robert Steel indicated during his company's conference call that the bank would not need more capital.
"Steel did an excellent job on the call. The reassurances that Wachovia won't need more capital gave investors some renewed confidence," Barkocy said.
Nonetheless, bank stocks have been on a wild ride as the crisis in confidence in Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) sparked a new round of fears about the health of the nation's financial system
The S&P Bank Index (BIX) plunged 25% between July 3 and July 15, and many of the stocks may have been oversold as investors became convinced that EVERY bank was the next IndyMac, which was taken over by the FDIC on July 11.
Several banks, such as Washington Mutual and National City, experienced gut-wrenching double-digit percentage drops in one day last week simply because of rumors that they were in trouble.
But the 34% bounce back in the BIX since July 15 may be nothing more than a big sigh of relief that bank results were not meeting the most bearish of doomsday scenarios.
New rules from the Securities and Exchange Commission to crack down on certain types of short selling in some financial stocks also appear to have contributed to the bank rally.
So you could argue that banks were overbought last week.
The S&P Bank index is now hovering right around the same level it was at before the Fannie/Freddie-fueled financial follies (alliteration is fun!) started on July 7.
The news from banks reporting results today is not significantly different than the news last week. Citigroup (C, Fortune 500), like Wachovia, didn't have a good quarter. It lost $2.5 billion. It just didn't lose as much as expected. And JPMorgan Chase (JPM, Fortune 500) may be holding up better than many rivals during the credit crunch. But its profits still sunk 53%.
The big problem facing investors now is that it is still difficult to say what lies ahead.
Chenault's bearish comments about the economy are in stark contrast to the words of Bank of America (BAC, Fortune 500) CEO Ken Lewis, who said Monday that BofA faced "manageable" credit losses ahead.
But it's getting tougher to argue that the economy will rebound sharply in the second half of the year. The current turmoil in the credit markets may delay a recovery, according to Philadelphia Federal Reserve Bank president Charles Plosser.
"The recent failure of IndyMac and the problems of Fannie Mae and Freddie Mac are the most recent events that have shaken confidence in our financial institutions and markets," Plosser said in a speech Tuesday morning.
"This has raised the uncertainty surrounding forecasts for the economy, including my own. As I have said before, and as these recent events demonstrate, the road to recovery is likely to be a bumpy one," Plosser added.
So it's altogether possible that banks could face more difficulties in the third and fourth quarter - even if writedowns related to bad mortgage investments ebb - because of rising delinquencies in credit cards, auto loans and other consumer loans.
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