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Tuesday, 24 June 2008

Financials: A Long Way from the Bottom

No tears are being shed on Main Street amid reports of more layoffs on Wall Street. But news both Goldman and Citigroup are each cutting 10% of their investment banking staffs is a worrisome sign for investors.

For the past year, many traders have repeatedly sought to find "the bottom" in financials and related stocks (i.e. homebuilders), but the reality is the sector is a long way from a true bottom. Beyond needing to further trim the fat, the financial sector is dealing with the double-whammy of stricter regulation and the 'deleveraging' process after years of massive credit extension.

That combination is going to result in slower earnings growth for the sector and a revaluation of brokerage stocks, which got well above their historic norms during the peak of the boom earlier this decade. Just like big-cap tech stocks like Cisco are still well below their bubble-era levels, it's going to be a long time before the Citis, Goldmans and Lehmans of the world revisit their recent peaks - if ever.

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