Tuesday morning greeted us with earnings from banking behemoth JPMorgan Chase (NYSE: JPM). The company said it earned $3.59 billion and that it nearly doubled the amount of money it saved for loan losses in the third quarter.

Breaking the results down into per-share earnings, JPM trounced the consensus estimate. The bank earned 82 cents per share, nearly double the expected 49 cents per share. Quarterly revenue increased to $26.62 billion from last year's same-quarter revenue of $14.74 billion.

Much like Goldman Sachs, BlackRock (NYSE: BLK) is a financial company that's delivered big gains for its shareholders over the past five years. In fact, BLK shares are up 188% over the past five years. More recently, the company's shares are up over 50% in the past six months.

BlackRock is an asset management firm that provides portfolio management services to corporate and public pension plans. It also manages pension funds for insurance companies, mutual funds, endowments, and private foundations. You might say that BlackRock is the money manager of choice if you've got a really big pension fund in need of the best money managers around.

What can you say about this crown jewel of brokerage and investment banks that hasn't already been said?

Goldman Sachs (NYSE: GS) is, by far, the most prestigious, as well as the most politically-connected, bank on Wall Street. Its success over both the fat years and the lean years has been difficult to ignore.

So it's no wonder then that shares of this iconic financial giant are up nearly 100% over the past five years, while stocks that comprise the Dow Jones Financial Services index were down 11% over those same five years.

Are financial stocks a buy now? Jeffrey Palma, a strategist for UBS says yes. He is recommending a modest "overweight" for this sector. He goes on to say that financials had the biggest gains among 10 industry groups in the MSCI World Index in the second quarter.

Let's be clear here. Mr. Palma is referring to the second quarter. The second quarter is done, finished. The real question is whether or not, going forward, the rally will continue.

Buying the financials while the Fed was aggressively cutting interest rates was supposed to be a no-brainer.

Banks, brokerages, insurance companies and other financial-related businesses rally in tandem to lower rates, which translates into cheap money for lending and investing.

A million and one professionals bought into this theme, and made the mistake of thinking the worst-case scenario for the credit markets was baked in back in June.

By mid-July, the bloodletting in the financial sector revealed giant writedowns being charged against earnings for huge exposure to subprime debt at the biggest banks and Wall Street firms. The rest is history, which is still being written to date.

Shares of Citigroup (NYSE: C) crashed from $25 to $3, Goldman Sachs (NYSE: GS) plunged from $180 to $47, and Bank of America (NYSE: BAC) fell from $40 to $10. You get the picture.

Patience is a behavioral virtue in more ways than one.

Billionaire investor Warren Buffett's bank-related investments increased 36% in Q3, while the Standard & Poor's 500 Financial Index declined 0.2%, as Buffett's subprime lender-avoiding strategy shielded him from losses in the sector, according to Bloomberg.

The rewards of waiting

Patience appears to have been a key to Buffett's impressive performance in the financial sector.

"In a word, I can sum it up: patience," William Frels, CEO of Mairs & Power Inc., told Bloomberg News. "Warren has the luxury of being able to exercise patience." Mairs & Power Inc. also holds some Berkshire stock in client accounts.

Shares of Berkshire Hathaway (NYSE: BRK.A) rose $3,100 or 3.22% to $99,550 on Wednesday at mid-day.

Economist David H. Wang said Buffett's results speak for themselves. "I wish he was managing my portfolio," Wang said. "Seriously, the results have to bring into discussion again the inherent problems of quarterly reporting. There has been much debate regarding how quarterly reporting influences corporate operational decisions, to the detriment of long-term business operation performance. Now we are getting more and more evidence that quarterly reporting may be hurting investment fund performance, as well." Wang added that he does not own shares of BRK.A.

The US markets did have a furious rally, rising 11% on major indexes. Overnight, Japan's Nikkei was up over 14%. The move to put money into banks and credit markets appears to be working.

But, don't forget the recession, which many economists see lasting longer than any downturn since 1974. Unemployment went to nearly 9% then. That is about 50% higher than the current 6.1% rate.

Yesterday, General Motors Corporation (NYSE:GM) said it would cut production more. Who would be surprised if the auto industry cut more jobs? The financial sector has lost tens of thousand of jobs, and as bank mergers go through, that is likely to go up sharply.

If there is on element which could pull the stock market back down, it is the realization that the economy is getting much, much worse and that corporate earnings will suffer accordingly.

A new wave of data about the economy will be coming soon. According to The Wall Street Journal, "The biggest data point is: the Census Bureau's retail sales report for September, on Wednesday. Economists expect sales tumbled for the third straight month, led by abysmal auto sales."

Investors who pour their money back into the market now, do so at their own peril. Don't forget the recession.

Douglas A. McIntyre is an editor at 247wallst.com.

Baudouin Prot , CEO of one of Europe's largest and best run banks, BNP Paribas (OTC:BNPQY), said that he believes that the worst of the subprime mess is behind us. What makes this statement important is that BNP is one of the few major banks not to take a serious hit from subprime. The bank estimates that their exposure to subprime is minimal this year and was only about 200 million Euro in '07.

In a Marketwatch report, Prot says: "There are no doubts the crisis isn't over. However, the worst should be over and I believe that in the second semester the crisis may normalize."

While I am skeptical of any bank CEO telling me that the worst is behind us, as they certainly have their own agenda of keeping their stock prices up, when the CEO of a bank that has had little exposure to the crisis tells me that he thinks the tide is turning, I would listen. After all he has an interest in watching some of his competitors fall further, as he could then swoop in and buy on the cheap. The fact that he isn't talking down the industry means that he truly thinks that we are beginning to see the light at the end of the tunnel.

No one seems ready to call a bottom in the financial sector, but with this report, investors may want to start researching the financials that are in the best shape, as we may potentially be near a bottom.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 6/29/08.

The stock market was down without much conviction in the early going with the DJIA off 40 to 50 points. But someone must have pulled the plug somewhere as it has been dropping fast from about 2 p.m. and the Dow was down over 180 points as I pecked away at the keyboard.

What the heck changed overall market sentiment so suddenly? Some say it's oil prices drifting higher. That's always a good scapegoat and probably has something to do with it. It might also be a connected issue with the raging conflicts in the middle east and Africa.

There is always the negative sentiment about housing, employment, last night's democratic primaries in Indiana and North Carolina just muddling on. It might also be our current president just muddling on, or it might just be that all of these things just prompted some profit taking after weeks of appreciation.

Maybe it is my pal Warren's negative sentiment about the financial sector and the years of pain that may still need to be worked out of the system. Whatever it is you can be sure that after the market closes the Wall Street pundits will discuss all their presumptions as if they were facts...

UPDATE: The DJIA closed at 12,814.35 down -206.48, or -1.59%

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money.

"The Warren Buffet related Muni-Bond insurance plan was a positive catalyst," notes options and market timing expert Larry McMillan in The Daily Strategist. Here, he looks at the overall market and some select buy signals in individual stocks.

"The multiple re-tests of the support area around 1310-1320 has inspired confidence as buyers have emerged. And the S&P 500 Index has been able to stage a strong rally above the 1350 level in the interim. This is a first positive step.

"Sector support behind the rally remains primarily in the Energy sector: however, the Financial sector has joined in somewhat. A continuation of these sectors rallying in concert would bode well for a continuation of he current rally.

The S&P 500 would be doing OK if it weren't for the total number and performance of financial stocks in the index.

Some 60% of the companies in the S&P that have reported fourth-quarter profits have beat estimates. But the companies that missed, mostly financial firms, have missed by so much, that it drags down the average profit of the pool overall.

According to the Associated Press, "Losses from financial players like Citigroup Inc., Bear Stearns Cos., and Merrill Lynch & Co. wiped about $61 billion from the S&P 500's overall profit during the fourth quarter."

In an odd way, this is good news. It means that the industries outside the financial sector are holding up relatively well. That indicates that employment in these parts of the economy may end up in relatively good shape. Capital spending may not be hurt as badly as some Wall Street analysts fear.

If much of the damage to the markets and corporate America stays isolated to the financials, the country could avoid a recession.

Douglas A. McIntyre is an editor at 247wallst.com.