Financials Idle As Investors Mull Housing Data

   By John Spence 
 

The overall U.S. financial sector was little changed early Wednesday in quiet trading as shares of bailed-out mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) lost some of their recent steam, shrugging off an upbeat report on new-home sales.

The Financial Select Sector SPDR Fund, an exchange-traded fund indexed to large-cap financial stocks, was flat in morning trading

New-home sales rose nearly 10% in July, the fourth month of gains, the Commerce Department reported Wednesday. The news fed hopes the housing market is finally forming a bottom after three years of pain, but it failed to push what have been red-hot shares of Fannie and Freddie significantly higher.

Investors have been bidding up the mortgage-finance firms that have been placed in conservatorship by the government, and the sharp rally has confounded analysts who say the companies are so deep in debt that their common equity is worthless. Investors have scooped up the stocks, as well as other beaten-down financial firms such as Citigroup Inc. (C) and Bank of America Corp. (BAC), in search of quick trading profits.

"Financials have been in the driver's seat since the March lows," said Cormark Securities analysts in a research note Wednesday.

They said financial shares are "following the roadmap" of the technology sector after the dot-com bubble popped in 2000, as tech stocks led the market higher. "A breakdown in the relative strength of financials should act as a warning for the broad market," the analysts warned.

Among individual financial stocks Wednesday, shares of Cardinal Financial Corp. (CFNL) and First Commonwealth Financial Corp. (FCF) moved higher on analyst upgrades.

Investors will be looking for any news coming out of a Federal Deposit Insurance Corp. meeting on Wednesday. The FDIC could ease rules to allow private-equity firms to invest in troubled banks, according to reports.

-By John Spence; 415-439-6400; [e-mail]