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Personal Finance > Investing
Cut leaves financials flat
June 27, 2001: 3:39 p.m. ET

Big-cap financial stocks don't see usual boost after Fed lowers rates again
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NEW YORK (CNNfn) - Troubled by earnings concerns, financial stocks failed to gain much ground after the Federal Reserve Open Market Committee cut interest rates Wednesday.

According to analysts and strategists, the financial sector traditionally benefits from a rate cut, but after Federal Reserve Chairman Alan Greenspan and company trimmed rates by a quarter of a percentage point the sector struggled, with many big names moving lower.

By borrowing short term and lending long term, banks can see immediate benefits from a cut, especially with the delay between the Fed move and banks moving their credit card or other interest rates lower.

But Bill Ryder, chief quantitative strategist at First Union Securities, said earnings worries for big brokerage houses may outweigh the positive effects of a rate cut.

On Tuesday, Merrill Lynch & Co. (MER: down $0.92 to $57.99, Research, Estimates), the nation's leading brokerage firm, said it expects second-quarter earnings per share of 52 cents to 57 cents in the quarter, down from $1.01 a share a year ago and well below the consensus forecast of 82 cents a share of analysts surveyed by earnings tracker First Call.

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Ryder said trading volume seems to be the difficulty big brokerages are running into, and it isn't going to change overnight.

"A s far as the financial sector benefiting, I think it's better to focus on the smaller and mid-cap financial stocks," he said.

Bank of America Corp., (BAC: down $0.12 to $60.28, Research, Estimates) Citigroup Inc. (C: down $0.35 to $51.80, Research, Estimates) , Goldman Sachs Group Inc. (GS: down $2.16 to $88.14, Research, Estimates), and Morgan Stanley (MWD: down $1.02 to $62.80, Research, Estimates)  were all lower in late afternoon trading.

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The financial sector was generally higher before the Fed announcement, indicating investors may have been hoping for a larger cut.

Ryder said savings and loan companies have done "remarkably well," and also pointed to real estate investment trusts as another good area for a boost.

Shares of top U.S. savings and loan Washington Mutual, (WM: up $0.82 to $37.43, Research, Estimates), which have fallen since it announced a $5.2 billion takeover of Dime Bancorp, (DME: up $0.71 to $38.41, Research, Estimates) moved higher, as did those of People's Bank (PBCT: up $0.21 to $23.87, Research, Estimates).

In addition to financial stocks, government-sponsored agencies like Fannie Mae  (FNM: Research, Estimates) and Freddie Mac  (FRE: Research, Estimates) also stand to gain from an interest-rate cut. In the long run, the companies, which package mortgages, stand to gain business when home buying rebounds. Short-term, government agencies have big bond portfolios. When interest rates drop, so do bond yields. Bond values go up, meaning the agencies' portfolios become more valuable. The same applies to insurance companies, the biggest holders of corporate bonds, which get a boost from a rate cut.

Insurer Conseco Inc. (CNC: down $0.04 to $14.59, Research, Estimates) got a slight boost after the announcement, as did John Hancock Financial Services Inc. (JHF: down $0.40 to $40.00, Research, Estimates) and MetLife Inc.. (MET: up $0.09 to $30.75, Research, Estimates)   graphic

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