Intermediate Size

Intermediate Size

Size Matters, Uh Um, I Am Talking About Hurdling

Remember Edwin Moses, the great hurdler from Dayton, Ohio? The man set one of the greatest streaks in sports. He won 107 straight final heats over a 10-year period.

The man was incredible to watch. He made the 400- meter hurdles look easy. The way he would glide over the hurdle without any effort at all, or at least it seemed that way. What most people don’t know is that Edwin Moses was a scientist, majoring in physics and engineering at Morehouse College in Atlanta. He applied his interest in science to his interest in track, and the results were incredible.

Well, we don’t need a scientist to see what is happening with financial stocks right now. The hurdles have been set so low that my 3-year old son could clear them as effortlessly as Edwin Moses cleared the intermediate hurdles.

I watched this past week as the banks and investment houses each stepped up to the podium to tell everyone how much their earnings declined.

Here is a summary of the week:

Monday- Although they weren’t scheduled to report until Friday, Wachovia Bank (WB) announces that they have received an infusion of capital, and oh by the way, we lost $0.14 per share this quarter, compared to earnings of $1.20 in the same period one year ago.

Tuesday- Washington Mutual (WM) reports a loss of $1.40 per share for the quarter after earning $0.86 last year.

Wednesday- J.P. Morgan Chase (JPM) announces earnings of $0.68 for the quarter after earnings of $1.23 one year ago. So what if they are half of what last year’s earnings were? At least they were still in the black. Also on Wednesday, Wells Fargo (WFC) announced earnings of $0.60 per share after earnings of $0.66 last year. Their motto, “Hey, look at us. We only dropped six cents off our earnings. Look at everyone else in the sector.”

Thursday- Merrill Lynch (MER) reports a loss of $2.20 per share after earning $2.26 per share one year ago. Add another $6.5 billion of fresh writedowns to the pile and make cautious statements about the next few quarters and you have a recipe for a rally, right? Not normally, but guess what? MER rallied after opening lower on Thursday.

Friday- Citigroup reported a loss of $1.02 per share after earnings of $1.18 one year ago. And the company missed estimates by seven cents, but rallied anyway.

Despite all of these earnings reports and the seemingly endless downward spiral for financial earnings, the S&P Select Financial Spyder (XLF) moved up the last four sessions. I don’t know about you, but these reports didn’t make me feel all warm and fuzzy about financial stocks?

But that is not the point. If you recall, this article started with a discussion about hurdling and Edwin Moses. Well, the point is that when the hurdles are so low that a snail could clear them, it isn’t hard to make it over. That is what has happened with financial stocks over the last week. However, before you start looking into financial stocks thinking the downturn is over, you might want to look at the XLF chart below.

There is still a lot of overhead resistance the XLF must overcome before I would declare the downturn dead. Once investors get over the euphoria of these companies not being as bad off as Bear Stearns, the reality will likely hit again and the stocks will resume their downtrend.

About the Author

Rick Pendergraft is Managing Editor of the free investment newsletter, Investor's Daily Edge.

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