Financial Contagion: Looking At Real Estate

With the financial sector leading the market down today, there is high likelihood that concerns over shrinking liquidity will pressure other equity sectors. Looking at the chart for XLF (XLF), the financials took a nearly 10% hit on very high volume, and dropped below the support level around 19.70.

- Wachovia (WB), which I have been mentioning nearly every day, was down almost 25%.

- Bank of America (BAC): The market appears to think BAC is paying too much for Merrill. This will be a news-driven stock. The chart shows a big break below resistance on huge volume.

As I mentioned in Saturday’s post (Be Ready for a Selloff This Week), there were many signals during last week’s trading. Looking forward, as the financial system sneezes and staggers, the rest of the market will catch a cold. Despite the market carnage, real estate stocks still appear overbought.

- iShares Down Jones US Real Estate (IYR): Nothing in this crisis helps commercial real estate. Today IYR broke down out of its rising trend on very high volume. It has support around 60.50. I am playing this one via SRS, the ultrashort version. I will be adding on a bounce or a convincing break below today’s low.

- Toll Brothers (TOL): Showing remarkable resiliency, but a tough road ahead. I have a small short position, and will add on a convincing trendline break.

- Imperial Capital Bancorp (IMP): Financials are not done going down. IMP is a smaller version with a long potential drop to the July lows.

I am lightly invested ahead of the Fed announcement tomorrow, and expect to trade lightly until the news is out. The government is in a very tight spot here, with few good options, if any. A rate cut could give the market a brief boost, but will provide no solution. Raiding the taxpayers’ wallets to cover other people’s bad loans is likely to become politically difficult. I will be keeping my eye on AIG (AIG) news as well, since their troubles will have large ripple effects. AIG was down over 60% today. Clock ticking at AIG:

Further complicating the picture for AIG and other financials is the wave of writedowns that’s likely to result from Lehman’s (LEH) collapse. “Due to the liquidation of an unprecedented scale, we expect a broad-based decline in marks on asset values within the financial markets,” Oppenheimer analyst Meredith Whitney wrote late Sunday. “The liquidation of LEH’s assets will force the other brokers to mark down their assets accordingly and therefore pressure all capital ratios.” She adds, a propos of the steep decline of the stock futures markets in early trading Monday, that she expects financial markets “to be under unprecedented strain over the next several days as players respond to outsized industry deleveraging.”

Subscribe by RSS Subscribe by Email