Financials Reflecting "Crazy" Nature of Stocks

Financial stocks today mirror the schizo nature of the stock market.There are a few big winners, and some really big losers. Speculation of a breakup of Citigroup is driving that stock higher and is drawing money into the financial sector.

The Financial Times reports today that a new CEO would be free to set a strategy on whether to break up the company. The paper interviewed acting chairman Robert Rubin and suggested NYSE Chairman John Thain would be a strong candidate as a result of that comment from Rubin.

Interesting item in Barron's, however. Citigroup's biggest shareholder Prince Alwaleed bin Talal is quoted as saying there's no need to bust up the "United Nations" of financial companies.

Getting Burned
There's no lack of negatives in the financial group today, and they go from bad to worse. Blackstone Group stock is taking a thrashing after earnings this morning. Countrywide is getting smacked but E-Trade is in an absolute meltdown, losing more than half its value.

The online broker lost more than half its share value on worries it may have to file for bankruptcy protection. E-trade Friday backed away from an earnings forecast it made last month because the value of its asset-backed securities dropped further. A Citigroup analyst today said a bankruptcy filing by the company cannot be ruled out.

Countrywide Financial, meanwhile, said in an SEC filing that if its credit ratings fall below investment grade, its access to the public corporate debt markets could be "severely limited." Its stock is getting dented.

Blackstone sees Subprime Opportunity
Blackstone Chief Operating Officer Hamilton "Tony" James, on the company's earnings call today, said the subprime disaster is getting worse. Yet Blackstone sees an opportunity and is starting to "go long" after its successful bet against the sector over the last 18 months. He said Blackstone invests through its hedge fund operation

"The subprime black hole is appearing deeper, darker and scarier than they thought," he said on the earnings conference call.

Golden Goldman?
Goldman Sachs
is another financial name in the news and its stock bounces higher despite a Bloomberg report that again raises questions about Goldman's big amount of level three assets. The question of whether Goldman will take a big or even small write-down rises on a regular basis even though the firm has put its reputation on the line with a firm denial it will take a write-down.

Personally, Goldman has told me three times there is no truth to the rumors and CNBC has reported it every time. Today, CNBC's David Faber reported on Goldman and the issues of level three. Here are the points he sent me in a note:

"Concerns that somehow the world will change on Nov. 15 when FAS 157 is in effect are institutions have been operating under FAS 157 all year.

Goldman believes level 3 assets can be valued and valued does have a higher percentage of level 3 than other firms but that is because its private equity investments (where it is the largest player among the investment banks) are in level 3, where they are valued at cost. Goldman is also very big in real estate, which is also confined to level three where it is valued with a discounted cash flow model, in the same way it has been valued for decades.

Goldman's leveraged loans are also in level 3. It took a write-down of $1.7 billion last quarter on its leveraged loan portfolio. It is worth noting that despite rampant fears that leveraged loans would prove an asset class of significant losses, it has not turned out that way. Virtually every deal of size reliant on huge financing has gotten done and those financings that have been widely sold down have seen their prices move up since they were sold (dollar general, first data, txu etc...)"

Goldman CEO Lloyd Blankfein speaks tomorrow at a financial services conference in New York. Investors will watch those comments carefully.

Market Chatter
The buzz word on trading floors this morning is "slowdown," says Cronus Futures Management's Kevin Ferry.

"The idea of a slowdown was hitting just the equities market across a broad sense last week, but it wasn't hitting commodities and the dollar. This morning that's all changed dramatically," said Ferry on "Squawk on the Street."

The S&P sectors today show financials as the leaders, bounding 2.5% higher. Some of the bump up is from a recovery in stocks like mortgage insurer Ambac and Citigroup's big move. Also moving is the energy secotr, down 2.41%. Oil is falling on reports that Saudi Arabia may want to increase production to head off higher prices and worries about slowing economic growth.

The dollar is higher against the euro and most other currencies though it is lower against the yen, as carry trade positions unwind.

And here's a poll suggested by reader Dan Skotek of Harrisburg, PA. He wants to know if the market is in a correction or not. Tell us what you think!!

Questions? Comments?