Friday, June 25, 2010

Financials Update at the Close $GS $XLF

· The financials were some of the best performing stocks in the whole market this week, although nearly all the gains came on Fri following the completion of financial regulatory form. Early Fri morning (5:30amET), the House/Senate reconciliation conference committees reached a compromise agreement on the last big outstanding issue (Lincoln’s derivatives amendment) and passed the bill (w/o any Republican support).The Senate as a Court of Impeachment for the T... The measure will now head to the full Senate and House for a vote next week (the process is expected to start Tues) w/Obama on track to sign the legislation by Jul 4 (meeting his months-long deadline). The finished product will impose new restrictions and costs on the industry, although the final bill was not as bad as some feared (esp. on “Volcker” and “Lincoln”); the initial St takeaway on the legislation can be summed up by the following Bloomberg headline (“banks dodged a bullet as Congress dilutes US trading rules in overhaul”). While investors are relieved for now, a lot of the buying occurring Fri was either short-covering or quicker trader-types “renting” exposure via the XLF; not a lot of people were rushing to make purchases in “single stocks”. Some are looking back to the health care 
legislation – when it finally passed, the HMOs (the stocks most exposed) rallied sharply and briefly, but gave a lot of the gains back and have been in a range ever since. For financials, the reg reform bill is now in the hands of the various regulatory agencies for specific implementation (as we have seen w/NAIC and health care, this process can be just as important as the initial legislation) while the Basel process looms on the horizon (we could hear more about this over the weekend at the G20). While regulatory headlines have dominated the group, the Q2 earnings season is fast approaching and this week a slew of sell-side firms cut numbers on the brokers and large capital-markets banks (due to the slow pace of activity, esp. in the month of May). While JEF had strong earnings this week, investors weren’t really extrapolating it to the broader space. While trading has been slow, credit continues to move in the right direction – DFS this week showed further improvement when it reported earnings (this is one of the reasons why the smaller regionals, which lack the large banking arms of the larger money centers, rallied more on Thurs/Fri as investors rotated into the most credit-sensitive banks into earnings)
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