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Financials Overshadow Rest of Market

Mary Thompson is filling in for Bob Pisani Monday.

Ask a trader why the market is down today and you'll get a whole host of different answers. Among the ones I have been told: concerns about the financials, the lack of resolution about Lehman's future, the lack of volume which makes the market more vulnerable to sudden swings, and the tensions between Russia and the U.S. over Russia's support of breakaway regions in Georgia.

The most common answer, though, is the concern about the financials.

Take a look at today's news: My colleague and co-host of Power Lunch, Bill Griffeth, maintains that on any other day, the good demand for Freddie Mac's sale of three and six month bills (even though it had to pay a higher rate to attract buyers) and the 3.1 percent increase in July existing home sales would be enough to drive the Dow up 200 points -- not down 200 points where it stands as I write.

I disagree. The report on existing home sales shows that median price of a home here in the U.S declined from last July. Until home prices stabilize, the declines in housing prices are going to have a negative effect on the value of the residential mortgage related securities held by the banks. This is likely to lead to more writedowns at these firms.

Then, a lot of regional banks, insurance companies and big banks own common and preferred shares of Fannie Mae and Freddie Mac. And while shares of these government sponsored entities are up today, they are down more than 90 percent over the last year.

In fact, in a filing with the SEC, JPMorgan said today its holdings in both firms have fallen by $600 million in the third quarter, a decline the banking giant said could affect its earnings. Keep in mind just a couple of weeks ago, it was JPMorgan which said the value of its mortgage-backed securities and loans declined by $1.5 billion earlier in the quarter, because of wider credit spreads and a lack of liquidity in the markets.

The problems in the financials cannot be solved by a single economic report or one strong debt sale by a GSE. So while we might see some one-day relief rallies in these stocks, the problems they face are still a long way from being solved. Until they are, being concerned about the financials is valid.

There are few bright spots today. Bonds are benefitting from the general aversion to stocks. Along with the financials, cyclicals and transports are big percentage losers. The transports are pressured by a downgrade of the trucking group by Wachovia, and that is offsetting the modest losses we are seeing in oil today.

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CNBC's Financials in the News:

- Video: Should Lehman CEO Fuld Be Fired?

- KKR Shows 'High' Interest In Lehman's Neuberger Unit

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