Financial sector gave early warning

David Berman, Financial Post Published: Friday, July 27, 2007:

The stock market is convulsing this week on a bad diet of defaulting subprime mortgages, postponed debt offerings and a sudden shift in investor sentiment. The collection of mostly Canadian banks and insurance companies has been selling off over the past couple of months, foreshadowing the mess hitting the current market and giving investors their first glimpse of a battered sector within a roaring bull market.

The S&P/TSX financials index hit a peak in mid-May, when the mergers-and-acquisitions boom was in full swing, private-equity buyouts were a snap to finance with high-yield bonds, the Bank of Canada looked as though it had put interest rates on hold and some observers thought the U.S. housing market was near a bottom -- all of which are fine conditions for bank stocks.

Now, investors are growing increasingly concerned about the credit markets and rising interest rates, months after these concerns first affected bank stocks.
After yesterday's stock market bash-up -- its third wallop in the past four days -- the financial index is under water this year with a loss of 0.7% and is 6.5% below its peak. In particular, Canadian Imperial Bank of Commerce shares are down 13.5% from their highs and Royal Bank of Canada shares are down 9.3%. Meanwhile, the rest of the S&P/TSX composite index is up 7.3% this year and is just 5.5% off its record high.

Financial stocks are not far behind over the same period.

Yes, investors are concerned over the extent to which Canadian banks are exposed to the deteriorating U.S. housing market, but early indications point to a rather limited exposure.

The way the market is headed, that buying opportunity may arrive considerably sooner.