Kass: Two to Tango

It is important to note that I don't think there is much downside risk to financial stocks but I do think upside targets have been reduced and (obviously) industry risk/reward has turned less favorable.

That said, some areas of the financial sector will benefit from lower interest rates in the form of improved capital market activity, continued low mortgage rates and a rotation out of bonds into stocks. These include private mortgage insurers such as MGIC Investment (MTG); investment brokers such as Morgan Stanley (MS) and Goldman Sachs (GS); and asset managers such as T. Rowe Price (TROW), Legg Mason (LM), Och-Ziff Capital Management (OZM) and Waddell & Reed (WDR). I would be adding to these on any weakness.

Banks, in particular, including Citigroup (C), JPMorgan Chase (JPM) and Wells Fargo (WFC), are negatively exposed to the Fed's Tuesday announcement of policy -- they have balance sheets that are net-asset-sensitive -- as non-trading income and net interest spreads will be compressed.

Life insurance companies such as Prudential (PRU), MetLife (MET) and Lincoln National (LNC) face reinvestment issues that will mute profitability and upside price targets.

Discount brokers such as Schwab (SCHW) and E*Trade (ETFC) -- I will have more on the latter company's punk results later today -- and investment brokers such as Goldman Sachs and Morgan Stanley face a more mixed picture. While discount brokers' profitability and "earnings power" will be negatively impacted by low interest rates, in theory, a more healthy stock market will draw retail investors back into the market -- and I expect daily average revenue trades to improve at Schwab and E*Trade after a weak fourth quarter 2011. The major investment brokerage industry's future profitability has been enhanced by the likelihood of improving capital market activity and the probability that merger and acquisition volume will accelerate in the months ahead.

Bottom line: I believe that this week's two new developments -- namely, the improved prospects for a Romney presidential election win in November and lower interest rates -- will serve to limit the degree of market consolidation that I previously had expected in my opening missive on Monday and raise the probability that new highs in the S&P 500 will be achieved later in the year. At the same time, the prospects for lower interest rates will negatively impact certain financial companies. Net-net, I still expect a correction (though more shallow than previously thought) and a period of backing and filling ahead -- before a new bull market leg commences.

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