Lilguy

Financials ETFs: Is the Credit Crisis Really Easing?

I can't disagree that companies--financial and otherwise--are beating estimates this quarter. I believe the number among reporting S&P companies is on the order of 60% beat earnings and 27% underperforming. That's a major reversal from last quarter's horrible performance by analysts.

Does that mean the market is turning or does it mean that the analysts are coming closer to reality in the assessments? I don't know.

What really sunk the financials the last two quarters was the massive uncertainty about the size of the bad debt they held, starting with mortgages and going through all the derivatives, and the Fed's response to the unknown financial hazard. The BSC bailout seems to have re-assured the financial sector that the Fed will come to the rescue when there is a systemic risk. At the same time, the size of the mortgage-related debt has now generally been assessed at a half-trillion dollars--give or take--by Goldman-Sachs and others. More importantly, it gives investors confidence (possibly unwarranted) that they can see the end of writeoffs since about half of that sum has already been written down.

But is the assessment correct?? Will the bad mortgage number get worse? Will there be a spillover into non-mortgage derivatives? Will the separate, but real, decline in consumer purchasing power from food and fuel inflation and stricter lending prevent the expansion of credit?

I dunno, but I won't be the first on the financials bandwagon.

Financial Stocks Trading Near Book Value

Price-to-book usually is valued at the company's stated book value or maybe an independent analyst's assessment.

None of that matters. What matters is how the company's counterparties see the book value and, more importantly, risk. If it looks bad, margins to up, liquidity shrinks, and insolvency follows--unless you can arrange for a bailout from your friends.