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Brokers Wilt in Debt Market's Heat

Worries about the health of U.S. credit markets are making it an uncomfortably hot summer for financial stocks.

With a record-low default rate, generally healthy corporate balance sheets and strong earnings growth, the financial stocks should by all rights be enjoying healthy gains.

But ever since low-quality debt in the subprime mortgage market hit the skids this spring, the flow of cheap financing that bolstered the buyout boom has started to slow. That slowdown -- and some high-profile scares like the near collapse of two highly leveraged Bear Stearns (BSC) hedge funds -- has pressured the sector even as the Dow Jones Industrial Average soars to new records and big mergers continue to be announced.

Stocks like Bear, Goldman Sachs (GS - Get Report), Merrill Lynch (MER), Morgan Stanley (MS - Get Report) and Lehman Brothers (LEH) have been hit hard in recent weeks. Bear Stearns has fallen 16% since February and Merrill Lynch has slipped 11% since a January peak. The financial sector of the big-cap S&P 500 is the index's worst performer this year, down 3%.

Even the industry's gold standard, Goldman Sachs, is off 5% since last month -- and some watchers say the worst is yet to come.

"The corrective phase isn't over," says John Roque, senior vice president and technical analyst at Natexis Bleichroeder. "More than likely, it is going to be uncomfortable," he writes in a recent note, like sweltering under "the bakin' Brooklyn sun."
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