Over the past month, two sectors have slowed the market more than any area: Financials and Energy. Of those sectors, Financials is the larger sector by market cap. Banks backed off this year’s gains after finishing a hot streak that almost no one predicted. That rise followed a punishing period that nobody but the doomsday finance prophets saw coming. One analyst wrote, “the financial-services sector faced the economic equivalent of a 100-year flood from August 2007 through March 2009.” Life is better for Financials these days, but it’s far from perfect. There are a few notable events in the sector that may shed light on why your Financial stocks have not performed well this month.
Part of the concerns relates to Dubai World’s credit-worthiness. The state-owned company responsible for building Dubai scared investors by renegotiating some of their debt payment, as we mentioned in our 12/02/2009 newsletter. Apparently, the man-made islands and the tallest building of the world was not built with UAE cash. Since then, some fears have been allayed. Markets have not melted down as some analysts worried, but Financials have not yet recovered from the blow in confidence.
More recently Citigroup (C) appears to be back from the grave. Once the largest bank in the country, Citi traded near a dollar in March 2009. They’ve climbed back to an almost-respectable 4 dollar handle with the help of some friends in Washington. The fact that Citi is even being mentioned as late as December 2009 is a testament to the soft spot politicians have in their hearts for banks. Citigroup is now seeking to raise capital for a $10 billion TARP repayment. They plan to issue common stock and at $4 a share, they need to sell 2,500,000,000 shares. Investors may now be remembering how bad off some banks were before the TARP infusion.
It’s also possible that some of the good caused by TARP and bailout money has run out of steam. Government spending has not slowed, but recession-wearied, sometimes-jobless consumers are not borrowing and making payments on as much as they used to. Unemployment is still a solid 10%, and that’s not counting the discouraged workers no longer looking for work or underemployed millions. As a result, Financials largest players have had a tough month. Banks with big consumer exposure have not fared well this holiday season: As of Friday, Wells Fargo (WFC) was down 12%, JP Morgan-Chase (JPM) down 8% and Bank of America (BAC) was down 5.5%. If you want to go long for a particular sector, then think twice about buying Financials at this time.