EmailThe S&P 500 Financial Index has been leading the way lower this morning as weak economic data has lowered investors perception of the group. The S&P Financial Index has fallen back below its 200 ma and has tumbled to 207.43, marking its lowest level of 2011. The economic weakness has been broad-based as housing prices, consumer confidence, jobs and manufacturing data have all missed expectations this week. This of course increases concerns of an increase in defaults for bank customers. An uptick given the recent multi-quarter improvement on credit quality is certainly not out of the question. Still, analyst commentary on the sector remains positive and it needs to be noted that banks balance sheets are vastly improved compared to 2007. The sector though continues to see headwinds and they are unlikely to go away which will keep potential returns capped and thus investors will view the sector as a possible capital preservation play at best for the immediate future.
News of note:
1) Bank of America (BAC) at Sanford Bernstein Conference: Bank reiterated that it did not need to raise capital in order to meet legal costs and that it was very comfortable with its current reserve levels. Also reiterated that it expected to see a $10 bln impact on the credit card business in relation to the Durbin amendment.
2) Allstate Corp. (ALL) is increasing prices for residential coverage after results missed the company's targets. "Overall returns have been inadequate" in the homeowners' segment the insurer said today in a presentation for its Investor Day. Pricing power in the insurance space has been attracting investors as of late.
3) BlackRock (BLK) upgraded to Buy from Neutral at Goldman... T. Rowe Price (TROW) downgraded to Neutral from Buy at Goldman... Citigroup (C) initiated with Outperform at RBC Capital Markets.
4) Compass Point initiates RAIT Invtmt Trust (RAS) with a Buy and price target of $3, based on their estimate of the net present principal recovery value of the two CRE securitizations, RAIT I and II. They recognize that RAS is a complicated story, as GAAP book value is arguably meaningless, and the presence of CDO overcollateralization triggers and complex VIE accounting methods muddy the waters. However, they believe the risk/reward potential favors the upside, and they view this as a transition point for RAS from a liquidity story into one with earnings growth opportunities.
