Is the Financial Drought Over Yet?

Is the financial drought over yet? I hear this question asked so often that I feel I will address it. I would have to say a clear “NO!” The housing market remains in crisis and the impact on the subprime mortgage and credit markets will continue. Yes, there have been major write-downs of debt relating to credit issues, but I do not believe it is over as of yet.

Financial stocks are currently a dividend play, but be warned that there remains downside financial risk in holding on to financial stocks with exposure to the housing market. On Tuesday, investment banker Merrill Lynch & Co., Inc. (NYSE/MER) cut its estimated annual earnings for Citigroup, Inc. (NYSE/C), saying the bank may need to write down an additional $18.0 billion of debt related to its weakened mortgage portfolio. Federal Reserve chairman Ben Bernanke’s warning that home foreclosures activity would pick up further complicated the fear on the Street.

So, while dividend yields are currently quite attractive based on the payout, I would be hesitant to accumulate financial stocks given the existing turmoil. The reality is that yields have moved significantly higher because stock prices have collapsed. In my view, I do not believe that this is a valid reason to seriously look at bank stocks. I would wait for clearer signs of strengthening in the mortgage markets before diving in.

All in all, trading continues to be driven by concerns towards a slowdown and recession in the United States along with housing and credit risk.

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Caution and volatility remain the key characteristics of the current market climate. The current trading is driven by headlines, which makes volatility a major issue.

As an investor and trader, you need to be careful in this market and protect your capital. Taking big risks could wipe out your capital for trading.