Bob Pisani is off today, this post was written by CNBC producer Robert Hum
Stocks opened modestly lower following weakness in Chinese markets overnight.
China’s benchmark Shanghai Composite plunged nearly 7% today on continued fears over tighter bank lending and on concerns that companies may issue additional shares, diluting the equity of current shareholders. The index is now down over 10 percent in 3 days, its worst 3-day decline since June 2008.
Despite the weaker open, the Dow and S&P are set to end the month with their best August since 2000. So far, the Dow and S&P are up 3.5 percent this month, while the Nasdaq has trailed with just a 1.8 percent rise.
The markets’ rise this month has been led by financials, which have soared 13%. The sector is now up nearly 150 percent from its March low.
Amid this surge, analysts are advising some caution on bank stocks:
a) Morgan Stanley, which has risen 325 percent since its 52-week low in October, was downgraded by Bank of America Merrill Lynch on valuation. Cutting the stock to “neutral,” analyst Guy Moszkowski warns that shares are “no longer deeply undervalued” and that shares “may be sluggish near term given lack of catalysts.”
b) Rochdale Securities analyst Dick Bove sees weak bank earnings in the near-term as loan loss reserves will continue to weigh on second half earnings. Additionally, regional banks will continue to face losses “into early 2010.”
However, looking ahead, Bove projects significant growth between 2011 and 2015, with earnings potentially growing 300-500 percent within that period.
Furthermore, the surge in the high beta financials, though while impressive, has become alarming. Despite their modest declines today, for the month of August, AIG is up 252 percent, Fannie Mae has surged 231 percent, Freddie Mac has skyrocketed 261 percent, and Citigroup has risen 57 percent.
