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Over the weekend, Barron's provided an excellent list of financial stocks that have been directly affected by the mortgage market blow-up and the downturn in the private equity business.Names included MGIC Investment Corporation (NYSE: MTG), Countrywide Financial Corporation (NYSE: CFC), JP Morgan Chase & Co (NYSE: JPM) and Lehman Brothers Holdings Inc (NYSE: LEH), to list a few. Beware of bottom fishing too quickly. As Newton's third law of motion says, for every action there is an equal and opposite reaction. With the housing bubble lasting three to four years, do not expect the housing and mortgage stocks to have sustainable rallies. It will take a number of years for the market excesses to balance out.
However, financial institutions that have exposure to the private equity market might be worth looking at and are in a better financial position to handle the excesses. Citigroup Inc. (NYSE: C) and JP Morgan stand out. Although it will take four to six months to work through the massive excess inventory these companies have committed to finance, these committed loans are not at risk of driving these two financial institutions out of business. Conversely, in the mortgage business, there are still plenty of companies that could go belly up.
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