Buffett and Bolder European Action Inspire Financial Gains

Brittney Barrett  |

Financials buoyed the broader market today in spite of continued weak earnings expectations for the major banks. The impetus for the rise came from the emergence of attractive valuations in the sector after being pummeled last week and the possibility of hope amid Europe’s current debt crisis. Given the recent volatility and the negative leaning figures, including some of the weakest housing data in recent history, the day’s gains are not being predicted to keep. Much of the rise is being attributed to the announcement by Warren Buffett’s Berkshire Hathaway (BRK.A) investment fund that it would begin stock buybacks with a guaranteed premium of as much as 10 percent beyond the book value at the time of purchase.

The buyback will be funded with the cash on hand, a luxury increasingly few companies can afford during economic times like these. Shares of Hathaway ascended over 7 percent in trading for the day. The gains far exceeded any other financial component and contributed to a lift in the sector of close to 2 percent.

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The remainder of the improvements within the sector were housed largely in the major banks which continue to rise, only to slip again at the next suggestion of bad news. The facts remain the same among these financial institutions; housing and unemployment are weak with flat U.S.growth and weaker than expected global growth. These factors will all make a true comeback for the banks difficult.  Furthermore, the Fed’s decision to swap treasurys in order to encourage the economy was also not well received last week and many presume it will lead to inflation. The threat of these factors, however, were ignored by some investors who routinely act on banks when they reach technical levels that look attractive.

There is perhaps no better example of this seeming myopia than Goldman Sachs (GS) and Morgan Stanley’s (MS) performance for the day. Shares of both companies were pummeled last week after debt downgrades from Moody’s but managed to edge up several percent in Monday trading.  A Bernstein Research analyst voiced support for the previous downgrades today, lowering price and earnings estimates for the banks. This did little to deter investors who found solace in the potential extension of current financial measures being taken in the Eurozone to bolster credit.

Cititgroup (C) improved more dramatically than its peers after Moody’s likely on the basis that Moody’s gave the bank a thumbs up by excluding it from mention in the debt downgrades.

Bank of America (BAC) and JP Morgan Chase (JPM) also performed well today on the basis of the promise for bolder action in the European debt crisis that continues to stall global growth and threatens to pull the U.S.back into a recession.

The extent of these measures is unknown and until officials reach a conclusion the present volatility can be expected to continue.

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