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Banks Lead Again as Housing Market Slows

NEW YORK ( TheStreet) -- Citigroup (C - Get Report) was the sector winner on Monday, with shares rising 1.7% to close at $53.30, as banks continued to lead the stock market higher.

The broad indices ended mixed, following two negative housing market reports underlining the expectation of some investors that the Federal Open Market Committee will not curtail Federal Reserve bond purchases when the FOMC next meets on Dec. 17-18.

According to Lender Processing Services, home prices in the United States rose just 0.2 % in September from the previous month.  Seven of the 20 largest states showed sequential home-price declines, which were concentrated in the Northeast.  Texas continued to lead among states seeing rising values, with home prices rising 7.5% from a year earlier.

Also on Monday, the National Association of Realtors said its Pending Home Sales Index for October declined 0.6% to 102.1 from an upwardly revised reading of 102.7 in September.  The index for October was down 1.6% from a year earlier, and was at its lowest level since December 2012.

At this stage of the extended and broad market rally, "bad news is good news" to many investors, since it underlines the notion that the FOMC will not quickly taper the Fed's "QE3" purchases of long-term bonds, which have been running at a net monthly pace of $85 billion since September 2012.  The Fed has also kept its target range for the short-term federal funds rate in a range of zero to 0.25% since late 2008.

The FOMC minutes released last week showed that a number of committee members considered lowering the rate paid by the Fed to banks depositing their cash reserves with the central bank from the current rate of 0.25%, in another attempt to stimulate lending.

The Financial Times on Monday reported that "Executives at two of the top five US banks" had said a decline in the rate being paid by the Federal Reserve on banks' reserve deposits "would lead them to pass on the cost to depositors."

What this means is that depositors -- currently receiving next to nothing from banks for savings deposits -- could actually be charged to park their money at some of the biggest banks.  While this may seem a strange notion, the largest U.S. banks have seen considerable growth in deposits over the past five years, while four of the five have seen total loan balances drop considerably.  The banks are awash in liquidity, and may push back against some depositors, since they could wind up losing money on balances parked at the Fed, when overhead and deposit insurance fees are factored in.

The KBW Bank Index on Monday rose 0.4% to 68.06, with all but seven of the 24 index components ending with gains.  The index has risen 33% this year, compared to an increase of 26% for the S&P 500 (^GSPC) and an increase of 23% for the Dow Jones Industrial Average (^DJI).


Shares of Citigroup have returned 35% this year and trade just below their reported Sept. 30 tangible book value of $54.52.  The shares trade for 9.8 times the consensus 2014 earnings estimate of $5.42 a share, among analysts polled by Thomson Reuters.  The consensus 2015 EPS estimate is $5.96.

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Chart of I:DJI
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