Weekly Recap - Week ending 25-Jul-08
The stock market was unable to build on the prior week's gains, but it wasn't for a lack of trying. In turn, it wasn't because it lacked catalysts either.
Oil prices slipped another 4.7% to $123.34 per barrel, the financial sector was up as much as 10.6% at its high for the week, earnings news was generally better than expected (or feared in some cases), and Congress, by all accounts, was on the verge of passing a housing bill that the president already said he would sign into law.
The surge in financials early in the week stemmed from a continuing sense of relief that there wasn't another round of dilutive capital raising efforts and the idea that Fannie Mae and Freddie Mac weren't going to be allowed to fail.
Bank of America kicked off the reporting for the financial sector this week and it did so a relatively good note, offering an indication that its intention is to maintain its current dividend. In contrast, Wachovia, Regions Financial, and Fifth Third all cut their dividend, yet none signaled that they would have to raise more capital through a stock offering.
The enthusiasm toward the financial stocks ended in a hurry on Thursday, though, when the sector dropped 6.8% and suffered its largest decline in more than eight years.
The thinking that the sector had gone too far, too, fast, coupled with the return of worries about the sector's financial condition, which followed many reports of large increases to provisions for loan losses, led to the reversal of fortune. From its high on Wednesday to its close on Friday, the sector dropped 9.7%.
From our vantage point, the financial sector pullback should not have been seen as a surprise.
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