Dividends in Danger at Regional Banks?

 |  Includes: FMCC, FNMA, KRE, RKH, USB, WFC, XLF
by: Kevin Cook

Yesterday I spoke with Jud Pyle, Chief Investment Strategist at The Options News Network, about trading action this week in regional bank names like Wells Fargo (NYSE:WFC) and US Bancorp (NYSE:USB). These stocks have been punished lately, along with the rest of the regionals, despite the fact they have reported no significant losses due to subprime risk and foreclosures. Both of them hit fresh 5 year lows yesterday on conjecture by investors that, as Pyle says, might go something like this: "Yeah, we know you haven't told us about losses from demonstrated bad business practices, but since we can't be sure, we're gonna need to sell you anyway."

Did the lending standards of these banks falter at all like some other regional banks, such that their financial stability will be greatly threatend? Until we know, investors are still adopting the best practice for financial uncertainty, in use since the Bear Stearns meltdown: if in doubt, shoot first! Unlike KeyCorp (NYSE:KEY) and FifthThird (NASDAQ:FITB), two among a handful of regional banks that had to cut their dividend, WFC and USB are still trading well above book value. As of 2:30pm EST yesterday, both WFC and USB had recovered strongly with the broad market from new lows hit in the morning.

Jud Pyle and I also discussed the impact of potential dividend cuts on options pricing, and why Freddie Mac (FRE) and Fannie Mae (FNM) could have substantial interest in their debt offerings while the stocks continue to tank. Check out my complete interview with Pyle by following this link directly to the video.

Speaking of recovering from potential bottoms, the trading action in the XLF yesterday, the financial sector ETF, showed some interesting signs of panic-driven volume capitulation. Friday was the first day ever over 300 million shares, and volume yesterday spiked to over 375 million with about 90 minutes left in the trading day! The XLF yesterday reached an all-time low, since its inception almost 10 years ago, of $16.77. We'll be watching this action today for clear signs, but it definitely has the ear-marks of a short-term bottom.