Beware the sucker's rally

Wall Street's big move Tuesday does not mean that the worst is over for bank stocks. There are some values in the market but investors need to be careful.

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By Paul R. La Monica, editor at large


NEW YORK ( -- Is the credit crunch over? News on Tuesday of the Federal Reserve pumping $200 billion of Treasurys into the market sent stocks soaring.

But several investing experts said that even if stocks rally again Wednesday, you shouldn't start popping champagne corks.

"There is the hope that the credit crunch is over but it's not founded in reality," said Haag Sherman, managing director with Salient Partners, a Houston-based investment firm and subsidiary of Sanders Morris Harris.

As stocks started moving higher Tuesday, Sherman said he thought many investors with bearish bets were forced to buy - or 'cover' their positions - so they could lock-in gains or minimize losses.

This seemed to be most evident with some struggling financial-services stocks. Shares surged, particularly toward the end of the day, as the rally picked up steam. Citigroup (C, Fortune 500) shot up more than 9%. Troubled bond insurer MBIA (MBI) soared nearly 13%. And savings and loan Washington Mutual (WM, Fortune 500) popped more than 18%.

"This has the look of some panic buying - it was a very big move," said Charlie Bobrinskoy, vice chairman and director of research Ariel Capital, a Chicago-based institutional investor with $13 billion in assets under management.

Bobrinskoy said some investors may have decided that bank stocks had been beaten up enough, especially if the the Fed's move helps ease the credit crunch.

"People can point to times where if you were able to catch large banks near the bottom, you could do extremely well. If people got the sense that the bad news is now behind us, you could have spectacular performance," he said.

However, Bobrinskoy is not convinced that the worst is over. "There are still some very big problems in the country's big banks, particularly in fixed income. And we still think there is the possibility of a major hedge fund going under. The Fed's action may help banks a little but it won't help a highly leveraged hedge fund that's underwater," Bobrinskoy said.

Sherman is also skeptical. The Fed has already been aggressive in getting money into the system. Being more so, he said, have negative implications. "I'm in the camp that pumping more liquidity into the market at the end of the day isn't going to help matters. It will just fan dollar depreciation and fuel inflation and ultimately be counterproductive," Sherman said.

So what's an investor to do? It's tempting to jump back into stocks following the Dow's more than 400 point jump and the nearly 4% spikes in the S&P 500 and Nasdaq. In fact, history suggests that stocks should feed off Tuesday's big rally - at least in the short-term.

According to data from Todd Campbell, president of E.B. Capital Markets, a research firm catering to institutional investors, the S&P 500 has added to its gains more than 60% of the time in the 30 days following a big one-day spike in the S&P. And on average, the S&P 500 has risen nearly 2% more in the month after a big up day.

But investors need to be selective. Sherman said he is still wary of financials and that instead, his firm has been buying commodities as well as shares of international companies that he thinks can benefit from higher inflation globally.

And Bobrinskoy said that Ariel did not make any moves on Tuesday, preferring instead to sit on the sidelines. Nonetheless, he said that the sell-off so far this year has created some long-term bargains. "We have, over the past two or three months, been buying what we think are high quality names that were oversold," he said

Two companies in the financial sector that Bobrinskoy said Ariel has been scooping up that he thinks have been unfairly punished are mutual fund company Janus (JNS) and commercial real estate services firm CB Richard Ellis (CBG). He also said that luxury retailer Tiffany (TIF) has been hit too hard on recession fears.

It just goes to show that there is money to be made even in the most jittery of markets. But the key for investors is to not get convinced that a big surge in one day constitutes a trend, especially for banks who have problems that won't go away overnight.

"The Fed is being creative and audacious. Any move that can help open the credit market working again and help staunch the domino effect we've been experiencing is going to be helpful ultimately. But whether or not this is the panacea, I doubt that," said Quincy Krosby, chief investment strategist with The Hartford. "The damage on the credit side has been dramatic and more than anyone expected."

What do you think? Are stocks back on track after the super Tuesday rally or is there more pain ahead? To top of page

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