Financial Stock Prices: A Bridge Too Far (WFC)(WB)(JPM)(CFC)(C)

As if some miracle had saved the financial system and averted a recession, shares in bank and brokerage companies moved irrationally higher last week. A case in point, Wells Fargo (WFC) moved up over 20% to $30.66. Most banks which reported earnings recently had no news that would encourage investors save that none is going out of business soon.

Nevertheless, Countrywide (CFC) moved up 21% last week. Wachovia (WB) was up 18% and Washington Mutual (WM) jumped 19%. Shares in Citgroup (C) and JP Morgan (JPM) made more modest gains.

The market has been shocked into thinking that a lack of bad news on financial companies is somehow good news. The malignant aspects of the economy have not gone anywhere. They were simply not in evidence during that last several days.

The immediate threats of a huge wave of downgrades in the municipal bond industry and signs of a sharply slowing economy could show up again this week. The Fed could cut rates again, but there are now arguments that this may not be good. MarketWatch points out that there is a "camp that believes the Fed will hold steady because it already has cut interest rates as much as it wants to do in the near term. Nothing has happened over the past week to change their minds."

If the Fed does hold its powder, Wall St. may enter another period of pessimism about financial shares. That could drive them right back down to where they were less than two weeks ago.

Douglas A. McIntyre