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Financials Still Calling the Market's Sickly Tune

Posted Jul 07, 2008 05:10pm EDT by Aaron Task in Investing, Commodities, Banking
Related: FNM, FRE, GS, XOM, YHOO, XLF, C
In a bear market, rallies die quickly - but this is ridiculous.

After trading as high as 11,399 before noon Monday, the Dow then swooned to as low as 11,120 before recovering some ground (and dignity) in the final hour, closing down 0.5% at 11,232. Following similar intraday patterns, the S&P lost 0.8% while the Nasdaq dipped just 0.1% -- boosted by Yahoo's 12% rise amid the latest revival of a possible deal with Microsoft, however conditional.

The Dow and S&P were once again waylaid by weakness in the financials. Citigroup, Bank of America, and Wachovia were the three heaviest traded stocks on the NYSE but Fannie Mae and Freddie Mac were the primary concern after a Lehman analyst said the two firms might need to collectively write down an additional $75 billion if forced to comply with a new FASB ruling. (Side note: When Richard Suttmeier, suggested nationalizing Fannie and Freddie on Thursday, he was saying this was something the government might choose to do to resolve the housing crisis. But if this selling keeps up, the government won't have a choice.)

Elsewhere, Goldman shares tumbled after its second-quarter trading figures showed the firm lost money on 20 trading days during the quarter, including 9 days with losses of $100 million or more, Bloomberg reports. In a jittery market, this overshadowed related news that Goldman's risky Level 3 assets fell 19% in the quarter.

Finally, it was not lost on many observers that the stock market fell "despite" weakness in commodities - notably oil - amid a stronger dollar. Led by steelmakers and paper companies, basic materials stocks generally fared well, but energy giants like ExxonMobil and Apache were notable losers.

There's a lot of good reasons to want oil to retreat and the dollar to rally, but equity investors ought to be careful what they wish for: commodity stocks, especially energy, are increasingly important to the S&P 500's weighting and the last "safe haven" for a lot of investors.

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