After the house vote, financials slumped 1.5% and led the decliners among the S&P 500 industry groups.  Analyst Meredith Whitney noted the biggest U.S. banks may face declining values on home-loan bonds with government backing as the Fed moves towards ending its $1.25 trillion purchase program.  Whitney said bank earnings are far from approaching "normalcy," and will reflect regulatory changes for an extended period.  JPMorgan (NYSE:JPM) fell 1.2% to $42.21 and Wells Fargo (NYSE:WFC) retreated 3.1% to $26.82.  Citigroup (NYSE:C) slipped 1.7% to $3.97.

On Wednesday, the 30-stock Dow Jones industrial average closed up 30.23 points, or 0.31%, at 9,802.14.  The broad Standard & Poor's 500-stock index edged was up 1.09 points, or 0.10%, at 1,046.50.  The tech-heavy Nasdaq ended the day almost unchanged.  On the New York Stock Exchange, eight stocks advanced for every seven that declined as volume slowed to 1.35 billion shares.

Meanwhile, gold prices continues their upward run and hit an intraday record high of $1098.50, before giving up most of that gain to settle at $1087.30.  The US dollar retreated 0.5% against a basket of currencies.

Yesterday, investors breathed a sigh of relief after the Fed’s announcement to keep interest rates near historically low levels for an extended period.  The Fed, in its policy assessment, noted the economic activity was likely to remain weak for some time and ruled out any plans of a premature exit.  As it continued with its highly accommodative monetary stance, the Fed offered a reminder that the current recovery still lacks strength to be self-supportive.

Healthcare shares Wednesday rose 1% and led the gainers within the S&P500 industry sectors as Republican gubernatorial wins were seen as votes against President Obama's healthcare initiative, likely to result in further delays to changes to the healthcare program. The Senate unanimously voted to extend jobless benefits and broaden homebuyer tax breaks, with the Congress expected to vote before week's end. Helped by the news housing shares finished higher, with Pulte Homes (NYSE:PHM) up 3.5%, Lennar (NYSE:LEN) up 3.4%, and DR Horton (NYSE:DHI) adding 3.2%.

Bear Stearns was one of the only prime brokers that had offered custody benefits to clients since 1997. The prime brokerage flourished after it was acquired by JPMorgan. Its Treasury & Securities Services division now manages $13.7 trillion in assets under custody and is the industry leader in prime brokerage and custody businesses.

The new development will further expand its product offering and deliver additional benefits to clients in a more efficient manner. As a result, it will be able to capture extended market share during the ongoing market challenges which have underscored the importance of partnering with a prime brokerage that can safeguard assets in a separate depository.

We think this is the right time to launch the Prime-Custody Solutions Group while the hedge funds are launching long-only funds and seeking structures that allow them to house certain assets with custodians.

Investors voted JPMorgan to receive 75 “Best in Class" awards and nine “Top Ratings" in Global Custodian’s 2009 Prime Brokerage Survey. During the second quarter, the company also repaid the full $25 billion in preferred capital received as part of the Troubled Asset Relief Program (TARP).

JPMorgan reported disappointing second-quarter results, with a 47.2% year-over-year drop in earnings per share. Although results benefited from a record performance by the investment bank and solid performances in other segments, Consumer Lending and Card Services deteriorated due to continued high levels of credit costs.

We expect continued synergies from the company’s diversification and strong capital position, but increasing provisions and worsening credit quality will be a drag on upcoming results.

• Williams-Sonoma (NYSE:WSM) reported a surprise second quarter earnings of 5 cents a share ex-items, versus Zacks projections of a 9 cents a share loss as revenues beat estimates at $672 million, ahead of expectations of $659 million.  The company expects 2009 sales of $2.84 to $2.94 billion

• JPMorgan (NYSE:JPM) analysts initiated coverage of Comcast (NASDAQ:CMCSA) with an "overweight" rating and a price target of $19

• Jefferies Group (NYSE:JEF) began coverage of Visa (NYSE:V) and MasterCard (NYSE:MA) with "buy" ratings
  
• Sony (NYSE:SNE) announced its e-reader, the Sony Reader Daily Edition, priced at $399, $100 more than Amazon.com (NASDAQ:AMZN) Kindle's entry-level version. A December launch is planned

So far, the Fed has reduced interest rates to almost zero and pledged to buy up to nearly $1.8 trillion worth of U.S. government and mortgage debt in order to combat a severe recession. This has been an attempt to prevent the economy from slipping into deflation, similar to what occurred in Japan when that country endured a decade of stagnation during the 1990s.

However, the St. Louis Federal Reserve Bank's President James Bullard has pointed out that having a withdrawal plan of the massive expansion of the U.S. monetary base is just as important. Without an exit strategy, expectations of high inflation may develop and feed into today's long-term yields. Therefore, financial institutions such as but not limited to Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), JPMorgan (JPM) and US Bancorp (USB) have increased their respective 30-year mortgage rates by 100 bp within the past 45 days. The result yields could continue to rise and thereby hamper recovery prospects.

The Fed may take several options to reduce its balance sheet to tighten policy. While issuing Treasury supplementary financing programs or the issuance of Fed debt may be unlikely choices given the size of the U.S. budget deficit, repurchase programs and the payment by the Fed of interest on reserves have been untested within the current context of what the U.S. central bank now is up against. The most likely avenue would be the selling of Fed-owned assets.

For April, home prices for 20 major cities declined 18.1% year-over-year, with an 18.0% decline for the 10-city index. However, since 2Q06, the 20-city index moderated by nearly 33.0% with the 10-city index off nearly 34.0%, or approximately the same levels experienced in 2003.

We would point out that April 2009 was the third consecutive month that both indices did not continue to accelerate at a record setting pace. Moreover, the yearly losses in 13 metros improved on a month-over-month basis.

While some could view this as the continuation of "Green Shoots," financial institutions, such as but not limited to Citigroup (C), Bank of America (BAC), US Bancorp (USB), Wells Fargo (WFC) and JPMorgan (JPM), are expected to experience additional financial statement pressures over the next several quarters as mortgage portfolios and the related securities continue to reel from foreclosure pressures in the pipeline.

While the Fed recently eliminated a liquidity program for money markets and moderated a minimal number of other facilities, it basically kept its liquidity safety net in place and extended the term of most of its programs, as it remains concerned that present financial strains will continue for a while.

Clearly the Fed's "exit strategy" will require extra finesse as to not decimate the recovery, or spawn excessive inflation.

Even though interest remains at a near historic low, a trip to any branch of a major institution - such as, but not limited to, Citigroup (C), Bank of America (BAC), JPMorgan (JPM), Wells Fargo (WFC) and US Bancorp (USB) - reveals that interest rates have crept-up by more than 100 bp over the past month, and these institutions also are charging a point or more.

What remains very interesting is that these same institutions are buying newly minted loans from mortgage brokers (typically carrying lower interest rates).

Investors can find such funds by checking out the entire list of the Zacks #1 Rank Growth/Income Equity Funds.

3 Solid Options

Yacktman Fund (YACKX) was incepted in July 1992 and seeks long-term capital appreciation and, to a lesser extent, current income. It may invest in companies of any capitalization.

The fund invests primarily in equities, including convertibles, of growth companies at what it believes to be low prices. It may also invest in short-term money markets for income and long-term, high-quality debt for growth.

The fund's key holdings include Microsoft Corp. (MSFT), AmeriCredit Corp. (ACF) and Coca-Cola Co. (KO).

JPMorgan Investor Conservative Growth A (OICAX) seeks income and capital appreciation by investing in a diversified group of mutual funds within the same group of companies that invest primarily in fixed income and equity securities.

The fund invests primarily in JPMorgan bond funds, with a smaller portion of assets in JPMorgan equity and money market funds. It offers broad diversification across asset classes, mutual funds, industries and securities.

Bala S. Iyer has been lead manager at the fund since its inception in December 1996. The fund's total returns have outperformed its benchmark index in the last 1-, 3-and 5-year periods.

Gateway A (GATEX) seeks to capture a substantial portion of the long-term total return potential of equities, while limiting portfolio volatility to a level similar to that of long-term bonds.

The fund may invest in all the 500 stocks included in the S&P 500 Index. As of December 2008, its portfolio turnover was 38%.

Unit holders have to make a minimum initial investment of $2,500 to enter this Zacks#1 Rank ("Strong Buy") fund. It has an expense ratio of 0.94%.

Discover Many More Funds

Learn more about the new Zacks Mutual Fund Rank and discover some of the best market-beating mutual funds by browsing our new mutual funds section. This part of Zacks.com offers a variety of tools, including mutual fund research, a new mutual fund screener, helpful answers to frequently asked questions and quick access to prospectuses and other information.

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward.

Whether it is merely temporary or a sign of something more durable it is hard to escape the fact that as the discourse on green shoots and second derivatives linger we might be entering a new leg of this crisis. Thus, there should be no mistake. We are very much still stuck in the mire and especially so in the context of the so-called developed OECD economies where it is difficult to see where any speedy recovery is going to come from. On the other hand the world is not made up entirely by the OECD edifice and it is exactly the potential for an asymmetric "recovery" and how global monetary policy might serve to transmit such a recovery which is the topic of this entry. In order to frame the discussion, it is worthwhile to go back to before the crisis where, most notably, the low interest rate environment in Japan was driving carry trading activity across the world with Australia, New Zealand, the Eurozone, the US as notable targets in the developed world edifice where also of course emerging markets were in the spotlight. Whether there are similarities with such historical flashbacks can be debated; but what is abundantly clear is that conditional on the return of some variant of an environment conductive to the carry trade something has also changed.

This change is most clearly expressed through the process by which the US Fed's credible commitment to maintain low rates may become the driving force for a search for yield and return (carry trade) in key emerging economies. In that light, my good friend Edward Hugh recently authored two extraordinarily important pieces and although it is hardly news that I plug Edward at this space I highly recommend you to have a look at these two. Nay, it is imperative that you read them.

The main thrust of the story is that after having observed green shoots throughout since February the carry trade wheel appears to be revving up again. Volatility have come down, risky assets have flown, money market rates in the G3 are beginning to behave, and reports have even come in that a seasoned carry trade veteran Miss Watanabe is once again dipping her toe although people close to the data also suggest that a lot of the effect from Miss Watanabe is clouded by Japanese corporates playing with transfer pricing.

[click on graphs for better viewing]

But, as noted, this time there is a twist. Sure, the BOJ is still running an almost open shop with respect to the provision of funding  to play the game but relative to the carry trade of old days, something has changed. Now, it is not the only the BOJ anymore but also the BOE, to a lesser extent the ECB, and most importantly the Fed who are forced to commit to very low levels of nominal interest rates in order to fight off deflation as well as to commit to the support of the restoration of a financial system which has been mortally wounded during the evolving crisis. In a world where uncertainty is high this is a prerequisite to avoid disaster, but in a world where sentiment suddenly shifts to the better it potentially becomes the underpinning factor for what some have dubbed the mother of all carry trades. It is of course this which we have been observing more than passing evidence of in the past weeks.

In a global macroeconomic context, this all goes back to the discussion of re-balancing and decoupling. In the most recent print edition The Economist calls it decoupling 2.0 and although I never liked the idea of decoupling as it was traditionally narrated with Europe or perhaps China taking over as the global supplier of net capacity (demand) it was also always going to be a very true narrative. To put it in other terms; the world decoupled a long time ago and it has long been clear that big emerging economies would rise to the scene to command a much larger relative position.

Besides this common ground, I have mainly had two gripes with the narrative. Firstly, the original idea that Europe and Japan would rise to the occasion to take over from the US was a mirage masked by the simple fact that the Fed reacted more quickly and swiftly to the incoming storm. Secondly, I have also been skeptical about the idea of China (and Russia even) providing demand through a more liberal policy towards the management of its capital account and currency. Essentially, Goldman Sachs' old conceptualization of the BRICs should be allowed to move into the eternal dust bin not only because there is a fundamental difference between China/Russia and Brazil/India, but also  because the emerging market edifice is much more diverse and important to be reduced to the whims of the punch line department at the world's biggest and arguably best investment bank. 

With these points on the table it is of course worthwhile to ask whether investors and other market participants are responding to this new narrative of vibrant growth in emerging markets and subsequent carry trade opportunities.

Even a modest glance over the recent news bulletins suggests almost a feeding frenzy as investors and their advisors scramble to exploit whatever window of opportunity that may have opened to make some easy money in an otherwise extraordinarily difficult environment. One notable example was in the context of the CEE economies where Deutche Bank recently suggested that investors borrow in Euros to buy the Ruble and the Forint. Of course, there are carry trades and then there is; well Russian roulette, and of all the potential punts out there this one would seem, to me, the equivalent of a trip to Las Vegas, playing on horses or another derivative of gambling. Apart from DB, Barclays have also picked up the baton with analyst Andrea Kiguel providing the main points that the Brazilian Real and Turkish Lira be the preferred targets of choice;

Brazil’s real, South Africa’s rand and Turkey’s lira offer the “largest upside” as investors return to the so-called carry trade, Barclays Plc said. A global pickup in investor demand for higher-yielding assets and signs the worst of the global recession is over “bode very well for the comeback of the emerging-market carry trade,” analysts including Andrea Kiguel in New York wrote in a report. The carry trade refers to the practice where investors borrow funds in a country with lower interest rates and then invest the money in nations where returns are higher.

Brazil’s real has gained 18 percent in the past three months against the U.S. dollar while Turkey’s lira has advanced 10 percent. South Africa’s rand is up 22 percent, the best performing emerging-market currency in the past three months. “As the decline of global risk aversion gives way to the re-pricing of U.S. dollar, we see potential for emerging-market foreign exchange to continue rallying,” analysts including Andrea Kiguel in New York wrote in a report.

The American Banks want to play ball too and emphasising the unusual and lingering low interest rate environment in Europe, Japan, and the US; JPMorgan and Goldman Sachs are hailing all systems go.

The carry trade is making a comeback after its longest losing streak in three decades.

Stimulus plans and near-zero interest rates in developed economies are boosting investor confidence in emerging markets and commodity-rich nations with interest rates as much as 12.9 percentage points higher. Using dollars, euros and yen to buy the currencies of Brazil, Hungary, Indonesia, South Africa, New Zealand and Australia earned 8 percent from March 20 to April 10, that trade’s biggest three-week gain since at least 1999, data compiled by Bloomberg show.

Goldman Sachs Group Inc., Insight Investment Management and Fischer Francis Trees & Watts have begun recommending carry trades, which lost favor last year as the worst financial crisis since the Great Depression drove investors to the relative safety of Treasuries. Now efforts to end the first global recession since World War II are sending money into stocks, emerging markets and commodities.

Speaking a language most investors can understand Bloomberg reports that a composite index constructed by ABN Ambro where the Euro, Yen, and USD are used to buy Turkish Lira, Brazilian Real, the Forint etc has so far earned an annualized 196 percent from March 2 to April 10. Such kind of rapid reversal of fundamentals can only be underpinned by a very strong dose of positive sentiment as the one we have been witnessing with all the talk about green shoots and second derivatives. As Macro Man points out the most recent survey on Global Funds Managers from Bank of America and Merril Lynch sported the biggest degree of optimism since 2004 and, naturally, a substantial re-allocation of assets towards emerging markets.

Now, this is of course all well and good but the underlying economic dynamics here are not as straight forward as they may seem. There are particularly two issues worth noting. 

On the one hand there is the simple issue of where all the liquidity provided by the BOJ, the ECB and the Fed is going. Only recently, the vice chairman of the Federal Reserve Donald Kohn pointed out that after getting a one trillion dollar boost from the Fed's purchase of treasuries and asset backed securities (most notably the MBS) the economy appeared to be on the mend. Leaving aside the question of whether the economy is actually on the mend or not the more fundamental question is the extent to which the Fed, the ECB and the BOJ can govern where exactly this "boost" is going and, of course, subject to what leverage multiple. This, I think, was what made Paul Krugman ever so timidly to venture the idea the perhaps some form of buy American/protectionism wasn't as bad as it was meant out to be. In a European context we can ask a similar question about whether all the liquidity provided by the ECB will simply move into the CEE to play the carry there and consequently further exacerbate the imbalances which have not been unwound yet.

On the other hand there is the receiving end where some emerging markets are already reeling under the prospects of sucking up the inflows. The first proverbial shot across the bow was fired by Henrique Meirelles who is in charge of the Brazilian central bank. Recently, he consequently pointed out that the central bank is standing ready to increase the purchases of USD in order to stem the unduly appreciation of the Real on the back of carry trade optimism and a resurgence of the upward trend in commodities which is a core driving force in the Brazilian case. But this runs much deeper than Meirelles recent comments. Going back to the last time, before the crisis, many emerging markets and commodity linked economies also squirmed under the pressure of inflows. Of course and undoubtedly much to the chagrin of many central bankers, raising rates to quell the inevitable inflation which comes on the back of hot money inflows only serves to worsen the problem. Thus, and with a number of central banks stuck at near 0 % in nominal interest rate, raising rates only intensifies the pressure. This was abundantly clear in economies such as Brazil, India, New Zealand, Australia, and most importantly in the CEE where many economies actually depegged with respect to the Euro because it was believed that the carry flows would lead to nominal appreciation which would choke off the inflation. The most ardent example of an attempt to halt the carry pressure was of course Thailand where capital controls on inflows were installed, not in order to to stem an outflow as originally described in the literature, but rather to avoid to much money coming in.

The key to understand this process is the nature of global monetary policy and the so-called credit channel. This is one of the reasons why I demand that you read Edward's posts linked above, but you could also go right to the source in the form of a paper by Danish economist Carsten Valgreen as well as my own account of said paper. The point is simply the extent to which economies can loose control over monetary policy and what this means. There is ample evidence I think that in a world where interest rate differentials of the current magnitude represent an inbuilt part of the edifice, there exist notable externalities from monetary policy. One aspect of this is created by the fact that some central banks basically have committed to a prolonged period of quantitative easing and another aspect is created by the fact that as the crisis ripples through, the world will be saddled with more economies than before dependent on exports to grow. These two facts taken together suggest that the pressure on those brave souls out there willing to stand up and run a deficit will also face what I have come to call a "turret ride" since when times are good the inflows may seem excessive only to retreat if the mood turns sour. As noted, following traditional convention hot money inflows can create investment bubbles and inflationary pressures (if you don't have the capacity) and the answer would be to raise rates, but if the low risk environment persists such policy measures will only intensify the pressure. I think that this aspect of the global economy is very important to take aboard.

Into the Light with Wings of Wax?

This may of course be much ado about nothing since in the current environment wreckers of havoc to the carry trade and any other kind of risk prone activity potentially lies around every corner. In this sense I agree with people closer to the market than myself. However, it is still worth paying attention to the way markets and investors are reacting and then to think about the consequences of the joint commitment by the big central banks to keep rates low. Clearly, such commitments are always subject to withdrawal if and when the respective central banks see it fit to suck back the liquidity, but so far that point is far into the horizon. This means that we are about to see just how much capacity there is to absorb the carry flows and where the money ultimately will flow. Some investors will certainly be flying equipped only with similar wings as Icarus while some again will be sporting a set of more durable wings. Whatever the future days and weeks will bring, I for one think it is fascinating to watch.

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Here are highlights from Tuesday's Analyst Blog:

FASB Changes Accounting Rule

The rules will certainly improve the transparency of the banks' balance sheets. In the stress tests recently conducted, the Federal Reserve had estimates of assets likely to be brought onto the balance sheet as a result of these amendments. It is estimated that 19 banks subjected to stress tests would have to bring about $900 billion of assets onto their balance sheets.

In their latest regulatory filings, Citigroup (C) estimated that the rule change would result in consolidation of $165.8 billion in additional assets, and JPMorgan (JPM) estimated it to be $145 billion.

We think that the new rule is a very positive move by FASB, after the much criticized and much debated revision allowed by it (under intense pressure from Congress) on mark-to-market accounting recently.

Pacific Ethanol Subsidiaries Bankrupt

Pacific Ethanol (PEIX) disclosed that lenders agreed to $20 million in debtor-in-possession financing.

Kinergy is the ethanol sales and distribution arm of Pacific Ethanol. It sells ethanol made by Pacific Ethanol as well as ethanol made by Midwestern producers. Pacific AG sells wet distillers feed grain to California's big dairy industry. The grain is a byproduct of producing ethanol, made after the fermentation process.

Pacific Ethanol is at a disadvantage to many of its rivals. It had to buy most of its corn from the Midwest, which raised its operating costs. The company also buys some corn in California. Pacific Ethanol said it plans to sell its ethanol and feed production under existing agreements.

As recently as 2007, the ethanol industry had a bullish outlook. However, with high corn prices it's become a very difficult market for ethanol producers. There are currently 10 other ethanol producers in bankruptcy, including VeraSun Energy (VSUNQ) and Aventine Renewable Energy (AVRNQ).

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About Zacks Equity Research

Zacks Equity Research provides the best of quantitative and qualitative analysis to help investors know what stocks to buy and which to sell for the long-term.

Continuous coverage is provided for a universe of 1,150 publicly traded stocks. Our analysts are organized by industry which gives them keen insights to developments that affect company profits and stock performance. Recommendations and target prices are six-month time horizons.

Zacks "Profit from the Pros" e-mail newsletter provides highlights of the latest analysis from Zacks Equity Research. Subscribe to this free newsletter today: http://at.zacks.com/?id=2677

About Zacks

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at http://at.zacks.com/?id=4580.

Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.

Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.

Contact:
Mark Vickery
Web Content Editor
312-265-9380
Visit: www.zacks.com

Investors can find such funds by checking out the entire list of the Zacks #1 Rank Real Estate Equity Funds list.

3 Strong Choices

Delaware Global Real Estate Securities A (DLRAX) seeks maximum long-term total return through a combination of current income and capital appreciation. The fund is non-diversified.

The fund primarily invests in securities issued by U.S. companies in the real estate and real estate-related sectors. As of December 2008, its portfolio turnover was 133%.

The fund's top holdings include Simon Property Group Inc. (SPG), Westfield Group (WDC) and Mitsubishi Estate.

JPMorgan International Realty A (JIRAX) was incepted in November 2006 and is been managed by Kay Herr, who has 15 years of industry experience.

The fund seeks long-term capital growth through investments in equity securities of real estate investment trusts and other real estate companies. It may invest in shares of exchange traded funds, common and preferred stocks, convertible securities, depositary receipts and rights and warrants to buy common stocks.

The fund is non-diversified. It has topped its benchmark index in terms of total returns in the last 1-year period. The fund distributes dividends annually.

Kensington Select Income A (KIFAX) seeks high current income and the potential for modest long term growth of capital. The fund invests at least 80% of its net assets in income-producing securities.

The fund may invest in common stock, rights and warrants to purchase securities and limited partnership interests to the extent the fund deems appropriate. While the focus is preferred/senior securities, the fund's allocation may shift based on market conditions. The fund utilizes portfolio leverage in pursuit of its objectives.

The fund distributes dividends quarterly. Capital gains, if any, are distributed annually. Unit holders have to make a minimum initial investment of $2,000 to enter the Zacks#1 Rank ("Strong Buy") fund.

Discover Many More Funds

Learn more about the new Zacks Mutual Fund Rank and discover some of the best market-beating mutual funds by browsing our new mutual funds section. This part of Zacks.com offers a variety of tools, including mutual fund research, a new mutual fund screener, helpful answers to frequently asked questions and quick access to prospectuses and other information.

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward.

Chicago, IL - April 23, 2009 - Zacks.com releases the latest Zacks Industry Rank. Stocks featured in this week's analysis include BB&T (BBT), Citigroup (C), JPMorgan & Chase (JPM), Morgan Stanley (MS), Comerica (CMA) and First Horizon National (FHN).

Zacks Industry Rank Analysis is written by Charles Rotblut, CFA, Senior Market Analyst for Zacks.com.

What Are Bank Stocks Really Worth?

Bank and "investment firm" earnings have been a mixed bag. Through yesterday evening, 10 S&P 500 banking companies topped estimates and 7 missed.

This morning, Morgan Stanley (MS) increased the number of disappointments to 8, joining other firms such as First Horizon National (FHN) and Comerica (CMA).

To be fair, Wells Fargo (WFC) beat by 18 cents, so we could change the score to 11 beats and 8 misses. Even with the changes, it is still a mixed bag.

Bank stocks had rallied over the past several weeks, due in part to speculation that first-quarter earnings would be better than feared. Several banks preannounced that they were enjoying good first quarters. Thanks to the Treasury and the Fed, money was cheap. Changes to FASB rules allowed banks to adjust their toxic assets. Not to mention that lenders were very choosy about their borrowers.

Yet, the realities of the current economic crisis and the mistakes of the past continue to haunt the financial sector. And brokerage analysts remain fearful about further quarters of poor earnings.

Even Positive Surprises Are Not Leading To Higher Forecasts

Even for firms that topped expectations, changes to full-year forecast are not optimistic. Though there have been some positive revisions, the majority of covering analysts are keeping their forecasts unchanged or are cutting them further.

Consider these examples:

    
• BB&T (BBT) earned 48 cents per share, 15 cents better than expected. Since the positive surprise, the full-year consensus earnings estimate has fallen 3 cents to $1.47 per share. Though 7 analysts have raised their projections, 6 others cut. Nearly half of the covering analysts have left their projections unchanged.
      
• Citigroup (C) generated a better-than-feared loss of 18 cents, 6 cents narrower than the consensus estimate. Just 2 of the 15 covering analysts raised their full-year forecasts during the last 7 days, whereas 4 lowered their projections. (Eight others have not changed their forecasts.) The average full-year projection now calls for a loss of 40 cents, 3 cents wider than a week ago.
      
• JPMorgan & Chase (JPM) beat by 9 cents with adjusted profits of 40 cents per share. Despite the positive news, the full-year consensus earnings estimate has since fallen by 2 cents to $1.51 per share. Though 5 analysts did raise their projections, 4 others cut. More than half have not made any changes.

In all 3 cases, the positive earnings surprise did not result in higher earnings estimates. This suggests that brokerage analysts do not view last quarter's positive trends as sustainable.

There is a reason for this. Even with the new FASB rules, the amount of write-downs will increase. The ending of the temporary moratorium on foreclosures, rising credit card default rates and higher unemployment will all have a negative impact on earnings. Further, the ability to borrow at ultra low interest rates will end at some point.

To be fair, it is very possible that some of the covering analysts have yet to adjust their full-year forecasts in response to the first-quarter earnings. Nearly all of the bank results have been released within the past 7 days.

On the other hand, there has been a sustained trend of negative estimate revisions for the financial sector that has lasted more than a year. Given the poor economic backdrop, the ongoing risk that an acceptable solution to the toxic asset problem won't be found, the threat of further share dilution, and the government's ever-evolving bailout plan, nobody really knows what banks will earn this year.

Nobody Knows What Banks Stocks Are Really Worth

The lack of a clear sense of what earnings will be combined with questionable balance sheets have made it impossible to assign a value to banking stocks. Brokerage analysts simply have no idea what a proper price target should be and neither does anybody else.

The fact that there isn't a clear exit plan out of TARP only adds to the uncertainty.

This is why bank stocks continue to trade based on sentiment, and not fundamentals or chart patterns. Bluntly put, the short-term risks of trading banking stocks remain extremely high.

Zacks "Profit from the Pros" e-mail newsletter offers continuous coverage of the industries and the stocks poised to outperform the market. Subscribe to this free newsletter today by visiting http://at.zacks.com/?id=2564.

About Zacks

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3:1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros.  In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit From the Pros by going to http://www.zacks.com/performance.

Visit http://www.zacks.com/performance) for information about the performance numbers displayed in this press release. 

Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.

Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.

Contact: Charles Rotblut, CFA
Company: Zacks.com
Phone: 312-265-9352
Email: pr@zacks.com
Visit: www.Zacks.com

Investors can find such funds by checking out the entire list of the Zacks #1 Rank Small-Cap Equity Funds list.

3 Strong Samples

Pioneer Small and Mid Cap Growth A (PAPPX) seeks long-term capital growth by investing primarily in the equity securities of small- and mid-sized U.S. companies that exhibit strong growth characteristics.

The fund primarily invests in equity securities of companies, which at the time of investment do not exceed the market capitalization of the largest company within the Russell MidCap Growth index. It diversifies by investing across a wide spectrum of industries.

O'Reilly Automotive Inc. (ORLY), Informatica Corp. (INFA) and DeVry Inc. (DV) are some of the largest holdings at the fund.

JPMorgan Small Cap Equity A (VSEAX) seeks capital growth over the long term. The fund invests in undervalued companies with leading competitive positions, predictable and durable business models and management that can achieve sustained growth.

The fund has outperformed its benchmark index in the 1-, 3- and 5-year periods in turns of total returns. As of December 2008, its portfolio turnover was 52%.

The fund's top holdings include Proassurance Corp. (PRA), Silgan Holdings Inc. (SLGN) and eHealth Inc. (EHTH).

First Eagle U.S. Value A (FEVAX) seeks long-term growth of capital by investing primarily in equities issued by U.S. corporations. It invests in domestic securities regardless of market capitalization, sector or asset class.

The fund seeks to preserve capital and consistently generate positive absolute returns independent of broad market conditions. It has topped the benchmark index in the last 1-, 3- and 5-year periods.

Unit holders have to make a minimum initial investment of $2,500 to enter the Zacks#1 Rank ("Strong Buy") fund. FEVAX distributes dividends and capital gains, if any, annually.

Discover Many More Funds

Learn more about the new Zacks Mutual Fund Rank and discover some of the best market-beating mutual funds by browsing our new mutual funds section. This part of Zacks.com offers a variety of tools, including mutual fund research, a new mutual fund screener, helpful answers to frequently asked questions and quick access to prospectuses and other information.

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward.

A new futures exchange  backed by some of the biggest banks and broker-dealer groups in the world is apparently ready to begin operations in June. 

The Electronic Liquidity Exchange is aiming to break the "near-monopoly" grip the Chicago Mercantile Exchange  has on futures markets in the U.S., according to the Financial Times. 

The New York City-based exchange was established by a dozen financial firms: Bank of America, Barclays Capital, BGC Partners, Citadel, Citigroup, Credit Suisse, Deutsche Bank Securities, GETCO, JPMorgan, Merrill Lynch, PEAK6 and The Royal Bank of Scotland.

In October 2008, ELE named  Neal Wolkoff as its chief executive. He was a former CEO of the American Stock Exchange. Before that he served as chief operating officer of the New York Mercantile Exchange.

At that time, Wolkoff said: "Initially, ELX will focus on the significant opportunity to bring lower transaction costs, successful innovation, and greater speed and efficiency to the global market in U.S. Treasury futures contracts."

The Financial Times notes this is a particularly challenging environment to launch a new exchange. Although through mergers and acquisitions the CME  has captured nearly all of the market for financial and commodity futures, trading volume in those areas have fallen dramatically since the credit crisis started more than 18 months ago. 

The ELX didn't immediately return calls for clarification on its launch schedule early Thursday. The new group does have a Web site with more information. You can find it here.