Financial Stocks Still Risky Territory

Negative bias dominated trading last week with the blue-chip DOW declining below minor support at 12,000 intraday on Wednesday and Thursday before rebounding. Selling mounted again on Friday, as the DOW was down to 11,903 in early morning trading. Investor sentiment improved last week, but there remains a slight negative bias toward stocks.

The issues concerning investors remain high oil prices and their negative impact on economic growth, along with renewed concerns on Friday regarding the condition of the U.S. banks in relation to credit problems. Merrill Lynch & Co., Inc. (NYSE/MER) sent a chill through the market after cutting its earnings estimates for regional banks. There was also speculation that Merrill may issue its own profit warning. The concerns followed on the heels of Moody’s Investors Service downgrade of the country’s two major bond insurers – MBIA, Inc. (NYSE/MBI) and Ambac Financial Group, Inc. (NYSE/ABK).

As I have been saying over the last few months, the financial services sector, especially those with large exposure to mortgages and debt, continues to be an area to avoid for the time being. Many of these companies remain largely dividend plays, but the threat of more downside weakness makes the risk too high at this point. MBIA pays a $1.36-per-share dividend at this time, which equates to a current dividend yield of 22.10%, but the bond issuer has been losing money, and is straddled with a massive debt load of $16.34 billion. This, coupled with negative cash flow, increases the chance that the company may cut or reduce its dividend payments.

The situation with MBIA is also true with numerous other high- yielding financial stocks. Buying them as dividend plays would not be prudent, especially if dividend cuts or elimination should happen. My view would be to stay clear of the financial sector until the full extent of the credit crisis is known. The worst decision would be to bet on unknowns, which is what is out there now.