Be Wary of Bouncing Bank Stocks
FiLife Take: Bank stocks are all over the place, and it looks like the road ahead will be bumpy for a while. Find out what's been going on, who's been suffering and who's been profiting with the help of this article.
Bank stocks are rising again on the back of quarterly earnings from big firms such as Bank of America and Citigroup that haven't been as bad as expected. But a slew of reports from smaller banks and regionals could soon ruin the party.
Some hard-hit regional banks report quarterly numbers Tuesday, and it won't be pretty.
Giants like BofA and Citi were helped by large profits from fixed-income and currency trading.
The banks reporting on Tuesday -- including Wachovia, Washington Mutual , Fifth Third Bancorp, KeyCorp , SunTrust Banks and Regions Financial -- lack the trading heft to generate similar windfalls. Their results will hinge in large part on how well their loan portfolios held up.
Defaults are accelerating on a wide variety of consumer and business loans. In all, the banks reporting Tuesday will have to set aside billions of dollars to beef up reserves. Their large mortgage portfolios are concentrated in regions where the housing slowdown has been severe.
Wachovia has other issues. Two weeks ago, the Charlotte, N.C., bank named Treasury Undersecretary Robert Steel as its chief executive and forecast a second-quarter loss of up to $2.8 billion.
That doesn't include an expected write-down of the "goodwill" associated with Wachovia's ill-fated 2006 purchase of mortgage lender Golden West Financial. Goodwill is the accounting term for an asset's intangible value; Wachovia reported holding $15 billion of Golden West goodwill as of Dec. 31. Mr. Steel may be tempted to wipe away a big portion of that in order to start his tenure with a clean slate.
He and his peers could wipe away the bounce, too.
The Good Old Days Not So Good at Cat
Some companies will look back on this time of a crumbling U.S. dollar and soaring commodity prices and think: Ah, the good old days.
Caterpillar , which reports second-quarter results Tuesday, could fit into that category. Its per-share earnings are expected to be up 24% from a year ago. A weak greenback has helped it sell more products overseas, offsetting slower demand at home.
The commodities boom also has benefited Cat, which draws nearly half of its revenue from the petroleum, power, metals and mining sectors, according to Merrill Lynch analysts.
Yet Cat's share price has languished. It feels the pain of pricier commodities, too, especially in the steel for its tractors and backhoes. The Labor Department's gauge of prices for steel-mill products -- which Stifel Nicolaus analyst Barry Bannister said is a leading indicator of higher costs at Cat two quarters later -- jumped 26% in the second quarter.
Mr. Bannister believes Cat can raise its own prices to offset that jump. Customers in Russia, the Middle East and Africa, which together account for 21% of sales, might accept higher prices. But price increases could be a harder sell in North America and Europe.
If that weakness bleeds into emerging markets and snuffs commodity prices, Cat's good old days w
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