Step away from the news for a couple of minutes and JPMorgan decides to get out its downgrade stick and go bashing the banking sector. The ratings house feels that the slowdown in growth in securities along with rising credit costs are going to impact the bottom line at major banks during the fourth quarter and on into 2010. JPMorgan lowered estimates for Bank of America (BAC), Regions Financial (RF), Wells Fargo (WFC), SunTrust (STI) and Fifth Third Bancorp (FITB). In addition to JPMorgan's less-than-flattering assertions about the finance sector, Rochedale Securities analyst Dick Bove stated that 26 of the 30 top banks (ranked by asset size) will have to raise capital if "we go to a 12% capital ratio."
All the news wasn't bad for the banking sector, as Citigroup decided to upgrade FITB from hold to buy. The problem is that this move does little more than create further confusion on what different analysts and experts believe is happening in the banking sector. Are these banks strong enough to survive another downturn? Are these banks set up for failure? One thing is certain -- uncertainty.
One way that I like to measure the viability of a given sector is to take a look at an exchange-traded fund (ETF) that tracks said sector. In this case, we have the SPDR KBW Bank ETF (KBE), which boasts several major banks in its holdings. This ETF is in the throes of a rather pronounced downtrend. Of course, that is to be expected thanks to the recent economic crisis.
The ETF is currently consolidating in the $20 to $22 region, but it faces resistance from its 20-month moving average. This trendline could act as resistance, especially given its southward path. Again, I would watch the sector carefully, as uncertainty reigns supreme.
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