Washed-Up, but Not Yet Whupped

Financial Hoists

Even as the broader market reversed course in one of those afternoon flame-ups today, financial stocks got whupped again (Josey). Amid rumors it will miss earning estimates, Chase Manhattan (CMB) fell 5.2%, while J.P. Morgan (JPM) -- off its low but still down 1.3% -- was the Dow's leading laggard. The Philadelphia Stock Exchange/KBW Bank index shed 1.4% and is now 17% below its April 27 closing high of 934.80.

The Fed's two rate hikes this summer, the dollar's decline and the subsequent (and anticipatory) rise in bond yields are proffered as main factors in the financials' foibles. There's a debate about whether higher interest rates really still dramatically impact banks' bottom lines, but the perception is there. And like possession and the law everywhere else, perception is nine-tenths of reality on Wall Street.

Yet, lo and behold, some prognosticators have recently come out bullish on the group.

In a recent report entitled "Favoring Financials," Salomon Smith Barney market strategist John Manley recommended Chase (oops), Wells Fargo (WFC), Lincoln National (LNCB) and Allstate (ALL).

"By almost any valuation measure, the financials sector is inexpensive," Manley wrote. "The risk, albeit a long shot, is that inflation does indeed become a serious threat. But with already low valuations and what we believe will be falling interest rates in the coming months, the rewards far outweigh the risks."

Today, Manley was unable to qualify the rumors about Chase. "I don't know of anything that would cause a shortfall in the number," he said. Chase's second-quarter results bested expectations and he expects that momentum to carry over (carry through? Cash and carry?) in the third stanza. Furthermore, third-quarter earnings comparisons should be "a little easier" for the group than in the second, when two-thirds of financials posted positive surprises.

Moreover, "it's amazing what didn't happen last year," he said. "Asia almost melted down, Latin America imploded, but banks didn't get killed. Banks are much better at managing their book of business. They've learned a lot. Some say that's because they've made every mistake possible, but I think U.S. banks are in pretty good shape right now."

Still, the strategist was not shocked by today's scuttlebutt about Chase, noting "any financial institution is always ripe for rumors because the business is always subject to vagaries you can't see [such as] problems on the trading desk."

While chagrined by Chase and the Gang's performance since his report was published Aug. 27, the strategist was unfazed.

"If I buy Chase today, I don't know if I'll be happy a month from now," Manley confessed. "But part of investing, at least part of your money, is being a little bit of a contrarion. Looking for things pushed down a long way for a reason, then looking for signs those reasons are close to going away. We're not trying to time it so perfectly."

Whew.

Piling On

"If you're an aggressive, risk-oriented trader you should perhaps look at some industry groups which have reached emotional extremes, such as financials," Hugh Johnson, chief investment officer at First Albany, said in a recent interview.

Johnson, who oversees management of roughly $550 million, is long Citigroup (C), Bank of New York (BK), Fleet Financial (FLT), Freddie Mac (FRE) and Cigna (CI).

"I've done a lot of hand-wringing," he admitted. "I'm not going to increase my exposure -- I do not bottom-fish. [But] they have appeared to be washed out many times in the past and worked. It's a possible source of trading ideas."

How's that for a rousing endorsement?

Finally, no less (and no more) a market seer than Abby J. Cohen of Goldman Sachs offered praise for the sector yesterday.

Fears about "troubling inflation" are unfounded, Cohen wrote. Thus, "financial services firms, which have generated solid profit performance and have nonetheless experienced noteworthy P/E ratio compression" offer "good opportunities."

Cohen did not provide specific recommendations, and was unavailable to reply to requests for additional comment.

Speaking of Washed-Up Sectors

Retailers enjoyed a lift for the second-consecutive session today. Still the S&P Retail Index is 14.2% off its April 12 closing high of 966.40.

Part of Manley's thesis about financials is a belief that higher rates will cool consumers. If you're moved by Manley's optimism about banks, it's best to avoid the retailers.

Unfortunately, you can't have it both ways (unless you're really flexible).

"By the time rates had backed up this much in 1994-95, the consumer had slowed," he said. "August numbers from retailers were not particularly strong. There are cross-currents, but it could infer something of a slowdown."

Meanwhile, when a guy like Jim Cramer asks for assistance, you know there's some confusion out there. From my brief encounters with him, I can report Cramer is a nicer guy than he's sometimes given credit for being. But at the end of the day (and probably in the middle of the night), he's a cold-blooded trader. If he had ideas of his own that he felt comfortable with right now, he wouldn't be asking for your suggestions. I guarantee. (His subsequent explanations notwithstanding.)

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