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Wachovia's Rally & Oil's Decline: Rotation from Energy to Financials?

by: David Templeton July 23, 2008 | about stocks: USO / WB / XLF    

David I. Templeton

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Wachovia (WB) announced a second dividend cut of the year on Wednesday and what happens? The stock spikes higher by 27% or $3.61 to $16.79. The company indicated the third quarter dividend would be reduced to 5 cents per share versus the second quarter dividend of 37.5 cents per share. The dividend totaled 64 cents per share in the third quarter of last year. The reduced dividend will conserve about $700 million of capital per quarter.

In yesterday's earnings release (See Call Transcript), Wachovia said it would loss $8.9 billion as a result of a $6.1 billion impairment charge. A large portion of the charge is related to a $5.6 billion addition to the loan loss reserve.

Given the upward price action in bank stocks late in the day Wednesday and the decline in oil prices (USO), could we be seeing a rotation out of many energy stocks into the beaten up financial sector?

(click on charts for larger image)

Wachovia stock chart July 22, 2008
Financial sector SPDR chart July 22, 2008
United States Oil Fund stock chart July 22, 2008

 Disclosure: None

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This article has 7 comments:

  •  
    Jul 23 05:11 AM
    Just Financials short covering helped by easing oil prices... But the story is not over... Do you want to buy Financials and make bottom fishing on that ? I think lots of investors are not willing to sell the sectors where visibility is good like Energy, and buy where the visibility is poor like Financials and Cons Discretionary . It s a dangerous game... It has already happened last month... This game between Financials and Energy is always the same but where is the logic? Structural issues are increasing more and more in terms of Energy supply combined with demographic issues in terms of demand... Does this logic has changed? Are we in a global recession to conclude that crude demand will decrease? No... Are we in a better economic context for the Financials ? No... Inflation is easing? No... Staglation is easing? No... Don t fall in this trap, don t catch this rally because it s not a relief rally.
    Reply
  •  
    Jul 23 07:49 AM
    Agreed, the switch is very tempting, but let's not kid ourselves here, the future doesn't look bright, and on a personal note, I feel the worse still has to come. This is not even a trader's market, at best it's a gambler's market. Do you want to be a gambler? If so, go to vegas instead...
    Reply
  •  
    Jul 23 08:16 AM
    I can understand the rotation from overweight energy,but why to financials like WB or other beaten up crap?There has got to be another sector that makes more sense...
    Reply
  •  
    Jul 23 08:51 AM
    fatcat - fair question, but who can resist BAC at 19? :-) Consider telecom or even pharma as two sectors that have been smacked around pretty well. I like DGG for global telecom, don't own it yet, but its on the watchlist.
    Reply
  •  
    Jul 23 09:02 AM
    Great observation, there indeed has been a rotation as the yen carry traders sold oil, and this prompted a sell off in the energy shares. They bought housing, financial, consumer services, retail, real estate, private equity, preferred and mortgage REITS.

    Yet this "rally of the dogs" will soon be over.

    I recommend that one day-by-day, dollar cost average invest in gold as per the linked article.
    Reply
  •  
    Jul 23 12:10 PM
    why financials? why not! they've been beaten to death, and would be an easy market to create a short term bubble on. once oil money begins to pour in and prices rise, everyone will jump in (panic buy) and prices will bubble. then in 6 month to a year they'll exit to create another bubble somewhere else. financial bubbles are a part of investment life now, there are just way too many $$$ out there to avoid it.
    Reply
  •  
    Jul 23 10:58 PM
    This looks like rotation to financials. When Wachovia missed estimates (badly) and stock went up, what other proof we need?
    Reply
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