Stocks: Commerce, Purchasing News Sets Off Bank-Stock Revival

Investors desperate to scoop up bargains in the banking sector found reason to buy after a flurry of economic news Thursday.

But some economists said investors misinterpreted the reports issued by the Commerce Department and the National Association of Purchasing Management in Chicago.

"Investors jumped the gun," said Scott J. Brown, an economist at Raymond James & Associates of St. Petersburg, Fla. "The fundamental picture of the economy has not changed. We are still in a very gray area."

Still, after a week of languishing, the Standard & Poor's bank index gained 2.50%, the Dow Jones industrial average 1.21%, the Nasdaq bank index 1.55%, and the S&P 500 index 1.13%.

Gainers included Firstar Corp., up $1.50, or 6.22%, to $25.625; Wachovia Corp. $3.3125, or 4.40%, to $78.625; and Chase Manhattan Corp. $2.375, or 3.25%, to $75.375.

Low valuations of bank stocks are finally beginning to work their magic on even the most fearful investors, analysts said.

"Some banks have had some big problems that were well publicized," said Hugh Mullin, senior portfolio manager for Putnam's Growth and Income Fund, which has 14% of its $42 billion under management in bank stocks. "But the businesses of most of these banks are reasonable, and stock prices are at very attractive levels."

Bank stocks have been at low levels for a while, but Thursday's economic reports -- which many interpreted as indicative of a slowing economy -- emboldened investors to buy.

The National Association of Purchasing Management-Chicago said its monthly index of regional manufacturing fell lower than expected, to 53.8, from 56.1 in August, suggesting that inflationary pressures are easing up. But Mr. Brown of Raymond James said that investors overlooked the fact that the price index -- a subsection of the total index -- rose to 71.0 in September, from 68.3 in August, which indicates rising inflation.

Investors also dismissed the rise in U.S. home sales, which jumped a higher-than-expected 2.9% in August, compared to 0.8% in July. And they welcomed the Commerce Department's revised gross domestic product figure for the second quarter, which equaled 1.6% in the period as businesses accumulated inventories at a slower pace.

Mr. Brown said it would be incorrect to assume that the economy is slowing on the basis of this figure because firms are likely to ramp up production in the fourth quarter.

Investors are just too optimistic, said Sung Won Sohn, chief economist at Wells Fargo & Co. "For whatever reason, the market has wrongly interpreted that the Fed will not raise interest rates next Tuesday.

"Interest rates are still rising and the weaker dollar is raising import prices, which will lead to higher costs of labor and energy," he said. "There is no evidence that the economy is slowing."

Mr. Sohn said the Fed will likely raise interest rates before the "Y2K season" in November or December, a time when volatility or illiquidity can cause havoc in the markets.

"The rally today is premature," said Mr. Sohn. "The financial and equity markets are wearing rose-colored glasses. They can see good news in anything."

Michael Mayo, a bank analyst at Credit Suisse First Boston, who has been bearish on bank stocks since May, said that investors are misinformed. "We don't think bank stocks are at compelling valuations," said Mr. Mayo. "The decline in bank stocks is not as significant when viewed in the context of the group's outperformance since the start of 1995." ?

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