Beaten-Up Banks Eye Bounce

Bear Stearns' rise since mid-August came as traders piled into the financial sector after the first wave of the summer's credit crunch appeared to wane -- only to be disappointed when the housing market sputtered again and ratings agencies slashed mortgage-backed securities and related derivatives.

The carnage created yet another set of bank and brokerage firm writedowns, as well as more unanimity among executives and analysts that the third quarter was just the beginning of a multi-quarter problem.

The second wave of writedowns by large brokerage firms continued this past week as Morgan Stanley, Wachovia(WB) and Citigroup announced greater losses.

Gloomy comments from Washington Mutual(WM) and credit rating warnings about mortgage insurers and financial guarantors MBIA(MBI) and Ambac(ABK) also contributed to declines in financial and housing-related stocks that were often 5% or more on any given day.

It's hard to imagine the bottom is in for bad news in the financials, particularly as the broader economy seems to be more touched by the mortgage market. Unlike August, bank, brokerage and lender executives are nearly unanimous in their warning that the worst is not over for them.

The Federal Reserve is even in on the worry. Last week, Fed Chairman Ben Bernanke testified on Capitol Hill to say that the economy is likely to go through a period of weaker growth due to the declining housing market and tumultuous fixed-income markets through mid-2008. Bernanke speaks again next Wednesday on the subject of "Monetary Arrangements in the 21st Century."

"The market is finally catching up to all the bad news," says Brandon Thomas, chief investment officer at Portfolio Management Consultants, the investment consultancy arm of Envestnet Asset Management, which has $43 billion in assets under management. "I think the markets have overlooked the bad news that has been here for some time."

Thomas and others are becoming more anxious about the state of the economy, given the Fed's anxious tone and executives' dim outlooks. Cisco Systems'(CSCO) fueled that fire last week when CEO John Chambers warned about a possible slowdown in business spending on technology upgrades.

Among economic data out next week, pending home sales for September will be reported Tuesday, while October's retail sales come out Wednesday. The consumer price index for October comes out Thursday, as does New York and Philadelphia's regional surveys of economic activity.

1 What would best describe your stance heading into the coming week of trading? Bullish Bearish Neutral 2 Which of these sectors do you think is set to move up in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities 3 Which of these sectors do you think is set to move down in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities View the results without voting

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