What Tuesday's Bounce Does and Doesn't Mean

Oversold stock markets finally saw a nice bounce on Tuesday. However, be careful, as it was just a bounce and was not indicative of a market reversal or bottom. The positive is that stocks have halted their downward slide for the time being, but, unless there is additional positive news, there will be more downside moves.

The five percent to seven percent spike on Tuesday was also triggered by some good news from Citigroup Inc. (NYSE/C) and optimism towards the banking system and economy. Clearly, the positive is the ability to bounce off the decade lows. I would want to see more sustained buying and strengthening of investor sentiment before getting excited. Be careful in chasing stocks higher in this market, as spikes will continue to be vulnerable to profit taking.

There is optimism that Citigroup could report an operating profit as early as the first quarter. The Fed came out and said that it will not let the major banks fail. It is clear that a return of stability to the banking sector would propel stocks higher.

But you need to be careful, as the banking sector continues to be full of uncertainties. Is the financial drought over yet? I would have to say a clear "NO!" The housing market remains in crisis and the impact on the subprime mortgage and credit markets will continue. Yes, the economic stimulus plan will eventually help, as an aid in unlocking credit to the economy. However, during the process, there will be issues to contend with, such as bad debts and less business from a crumbling economy.

Citigroup recently cratered at below $1.00 a share, which is down over 96% from its 52-week high. Yet, we are still seeing investors move to bank stocks for their dividends, which concurrently have been significantly reduced across the banking sector in order to conserve government capital loaned.

I would not advise buying these banking stocks as a dividend play. Be warned that there remains downside financial risk in holding on to financial stocks. There is still a chance that the major banks could fold, albeit, not according to the Fed. There is also the issue of nationalization, because the government's ownership in some of the major banks continues to rise, as TARP funds are advanced. You can kind of wonder who is controlling the moves of the banks in which the government has a major investment.

So, while dividend yields appear somewhat inviting, I would be hesitant to accumulate financial stocks given the existing turmoil. The reality is that yields have moved higher because stock prices have collapsed. Wells Fargo & Company (NYSE/WFC) currently has a dividend yield of 13.60%, but it is largely due to the collapsed share price. WFC currently pays out about $57.66 billion annually in dividends, but with a mere $128 billion in cash and $375 billion in debt, you've got to wonder if the dividend will be cut. If so, I feel it could be by as much as 50% or more to reflect a more realistic yield.

In my view, I do not believe this is a valid reason to look at bank stocks seriously. I would wait for clearer signs of strengthening in the housing markets before diving in. Some of the larger banking stocks should only be viewed as speculative trading stocks. They are not buy-and-hold investments, because of the downside risk of default.

Profit Confidential

---

http://www.profitconfidential.com/

LOMBARDI PUBLISHING CORPORATION
News, Analysis, and Information Services Since 1986.
One Million Customers in 141 Countries.

Lombardi Publishing Corporation
Financial Publications Division
350 Fifth Avenue, Suite 3304
New York, NY 10118-3304

---

Copyright 2008; Lombardi Publishing Corporation. All rights reserved. No part of this e-newsletter may be used or reproduced in any manner or means, including print, electronic, mechanical, or by any information storage and retrieval system whatsoever, without written permission from the copyright holder.

Article Tags: Major Bank

Source: Free Articles from ArticlesFactory.com

ABOUT THE AUTHOR