Bank Downgrades Hit Stocks

After days of rallying, US stocks finally took a breather to close nearly flat on Tuesday. The Dow Jones Industrial Average (DIA)12532.60 -16.04 -0.13%) shed just 0.13%, pulled down by banking stocks downgrade, particularly that of Bank of America (BAC) (40.97 0.00 0.00%) which got downgraded by Merrill Lynch. Shares of Bank of America dropped to $40.97 on the New York Stock Exchange. The Nasdaq rose 0.6%, after an upbeat report on chip maker Qualcomm (QCOM) 40.80 0.00 0.00%).

The Nasdaq (QQQQ) 2341.05 0.00 0.00%), which emerged from bear-market territory a day earlier, chalked up its best three-day percentage gain since March 2003, a cumulative total of 5.8%.

It remains to be seen whether the rally in stocks is a dead cat bounce or whether more investors will jump on the bandwagon ever since the Federal Reserve financed part of the deal for JPMorgan (JPM0 (46.06 0.00 0.00%) to buy over Bear Stearns (BSC) (10.94 0.00 0.00%) last week. Both JPMorgan and Bear shares were down Tuesday. Punk Ziegel analyst Richard Bove (the same guy who optimistically declared the financial crisis over last week) said JPMorgan isn’t underbidding for Bear Stearns. He said that JPMorgan is in fact paying more like $65 a share, and is using a huge chunk of Morgan capital to buy a company that is losing market share.

Merrill Lynch (MER) (47.85 0.00 0.00%) had its 2008 profit estimates cut by 45% by JPMorgan on concern the third-largest US securities firm by market value may disclose further writedowns on subprime mortgages. Merrill may report a total of $5 billion in additional losses on collateralized debt obligations, so-called Alt-A mortgages and commercial mortgages. JPMorgan said:

In our view, Merrill Lynch is overexposed to the credit markets, which have been challenging, especially in the areas where Merrill has been most active.