A pattern has been born from the recent volatility that has been particularly evident within financials. Shares of major banks tend to make significant gains on days when the broader market sets a positive pace. The appeal of financials right now is primarily related to certain metrics used to measure earnings in relation to share prices. The fact that banks have become so technically cheap leads many bargain bin buyers to snap up companies.
Even banks with extreme exposure to the current weakening of the housing market tend to edge higher along with the rest of the sector. This has been the case for Citigroup (C) which managed to fight its way back from lows in spite of a bevy of threats to its current business. Bank of America Corp. (BAC); however, managed to be the exception today as the North Carolina based financial institutions continued to sag.
Shares of Bank of America have fallen over 15 percent over the past week, alongside renewed anxiety surrounding the potential need for more capital. In early morning trading, the stock fell to $6.01, its lowest levels since the start of 2009. Another metric exhibiting recessionary levels at BAC is its five-year credit default swap level, which widened to 388 basis points. That level was last seen in the spring of 2009, when confidence in the broader market and specifically banks, bottomed out. Wider spreads indicate that it’s costing investors more to purchase protection against a potential negative credit incident. This has led to questions regarding whether BAC has the balance sheet potential to survive the mortgage issues that continue to linger for its 2008 acquisition.
The investors that continue to pursue financial stocks after a dip seem to be viewing the recessionary numbers at Bank of America as a challenge without the potential for contagion. The weak housing market and rising number of mortgage defaults seem to be telling a different story. The threat of European debt contagion and the weak housing markets will likely impact the longevity of bank recovery across the board.
That did not stop investors from snapping up shares of Wells Fargo (WFC) today and Citibank (C), the latter of which Wall Street has a highly fickle relationship with. Wells Fargo, perhaps for being among the stocks in Warren Buffett’s portfolio, tends to rise with particular gusto after losses.
American Express (AXP) also had a strong performance for the day as some embrace the “rich get richer” strategy and pursue AXP, the credit card provider of the wealthy, as a strategy for benefitting from the broadening divide between the classes.
If the recent volatility is any indicator the financial gains of today will perhaps be easily derailed by the next bout of negative economic news.
