In U.S. bank stocks, fear trumps fundamentals

By Jonathan Stempel

NEW YORK (Reuters) - Investors interested in buying and selling U.S. bank stocks based on the performance of the underlying businesses might well have gone on holiday this week -- and might stay there next week.

The stocks swung wildly this week. For two days, they headed south amid disappointment that quarterly results from banks such as Buffalo, New York's M&T Bank Corp (MTB.N) and U.S. Bancorp (USB.N) reflected rising loan losses.

Then on Wednesday, the sector powered higher as the larger lenders Wells Fargo & Co (WFC.N), JPMorgan Chase & Co (JPM.N) and Citigroup Inc (C.N) reported results that were much better -- or less bad -- than feared. The 24-member KBW Bank Index .BKX soared 28 percent on Wednesday and Thursday alone.

"Fundamentals are being ignored," said Tim Ghriskey, chief investment officer at Solaris Asset Management LLC in Bedford Hills, New York. "Having said that, the fundamentals we're looking at are dated. They reflect the second quarter, which is history, and the stock market is a forward-looking mechanism."

Some of the gains may have been attributable to falling oil prices and regulators' crackdown on short-selling investors who try to push bank shares lower.

But investors remain on edge, making it difficult to place big bets ahead of results expected next week from lenders such as Bank of America Corp (BAC.N), Wachovia Corp WB.N, Washington Mutual Inc WM.N and National City Corp NCC.N.

Market illiquidity, meanwhile, has left banks with too many assets that have no buyers, or which are hard to value.

"Valuation is not a good measure of what to buy or when to buy, because we don't know what we're valuing," Ghriskey said. "There is so much confusion."

ALL CLEAR? NOT YET

Before Wednesday, the KBW index had fallen 45 percent this year, and 60 percent from its February 2007 peak, as the industry struggled with losses from complex debt and mortgages.

This has resulted in more than $400 billion of write-downs and credit losses, in excess of $120 billion of capital raises, and a slew of dividend cuts. More of each is expected.

Compounding the troubles was regulators' seizure last week of IndyMac Bancorp Inc IDMC.PK, the nation's biggest banking failure since the 1980s. Several lenders issued statements to dampen speculation that they could be next.

Wells Fargo's results, released Wednesday, eased fears. While profit fell 23 percent, they appeared strong given the fifth-largest bank's decision to set aside a healthy $3 billion for credit losses.

The KBW index rose 17.3 percent that day, the largest one-day gain since the index began tracking stocks in May 1992. Wells Fargo's own shares rose 33 percent.

On Thursday, the index rose another 9.4 percent after JPMorgan Chase & Co (JPM.N), the third-largest bank by assets, said profit fell 53 percent -- again, better than expected.