Financials Headed Back Down? 3/24/08

"Much like a kidney stone, This too shall pass..."

That the broader markets held up today is actually pretty encouraging given the shaken consumer number and the grim news from the housing front. But the report today further confirms the extent to which the turmoil in the housing market has infected the broader market.

I wrote about the rally in the financials yesterday. For the reasons I pointed out, I think it's likely the financials will go lower near term, and it looks like any recovery will be long (6-12 months) and bumpy. So, if you're long the financials, if you're in positions in like C, MER, JPM, GS, MS, and the like, you could consider writing some covered calls against these positions as a way to protect against the short term downside while retaining the long-term exposure.
Some of the financials, however, it's time to bag entirely IMHO. I'm especially bearish on C and WB. Wachovia's 9.5% dividend seems unsustainable, and a reduction in the dividend would be disastrous for the stock price. But, more importantly, the analysts say that it's likely that WB's true exposure to credit losses has not been fully elucidated due in part to its foreclosure accounting methods, even after they swore up and down that all the skeletons were out. Another write-down would be bad for investors. (I try to elegantly understate...)