Bank Stocks Gain as Fed Changes Stance on Rates

Financial markets weakened Tuesday despite signs from the Federal Open Market Committee that interest rate cuts may not be far off.

Stocks generally rallied during the morning but lost some value in late-afternoon trading. The American Banker index of the top 50 banks gained 0.53%, and its index of the top 225 banks, 0.56%; the Standard & Poor's 500 index dropped 1.3%, and the Nasdaq stock market, 4.3%. In a statement released after the meeting of the Fed's interest rate policy committee, the central bank indicated that it now considers slowing economic growth to be more of a threat than inflation. "The drag on demand and profits from rising energy costs, as well as eroding consumer confidence, reports of substantial shortfalls in earnings, and stress in some segments of the financial markets suggest that economic growth may be slowing further," the Fed wrote.

Bruce Steinberg, the chief economist at Merrill Lynch & Co., said the Fed's decision was a move in the right direction, but he said an easing "would have been more desirable." He said the statement was the first step toward a reduction of interest rates, which he expects to begin in January.

Elsewhere in the market, Joseph Duwan at Keefe, Bruyette & Woods Inc. downgraded Mellon Financial Corp. and PNC Financial Service Group Inc. to "outperform," from "buy," saying the adjustment was based "solely on valuation."

Mr. Duwan wrote in a note that his new ratings are "more appropriate" in light of a 60% appreciation of PNC's stock and 49% increase of Mellon's valuation this year. His target prices are $78 for PNC and $55 for Mellon.

Mellon closed down 75 cents, or 1.47%, at $50.125, and PNC rose 87.5 cents, or 1.23%, to $71.9375.

Also on Tuesday, Lehman Brothers analyst Henry Dickson reiterated his "outperform" for PNC and "buy" for Mellon but increased the target prices for both, to $80 from $65 and $60 from $57, respectively.

Mr. Dickson also changed his target prices for three other banking companies he follows. He increased Northern Trust Corp.'s target to $92, from $81; National City Corp. to $29, from $26; and KeyCorp to $29, from $25.

Meanwhile Tuesday, the U.S. Department of Commerce reported an October trade deficit of $33.2 billion, $600 million less than the month before. Overall, imports fell 1.6% and exports declined 1.5%.

Kenneth T. Mayland, president of Clearview Economics, took little comfort in the deficit's narrowing. He said he is concerned that the imbalance could cause "a financial catastrophe" if foreign investors lose faith in the U.S. economy.

Morgan Stanley shares lost 25 cents, or 0.36%, to $69 after the company announced lower-than-expected fourth-quarter earnings (see story, page 1). The company blamed a downturn in capital markets activity and higher compensation expenses for the decline. CIBC World Markets analyst Steven Eisman reiterated a "buy" rating on Morgan Stanley, which in addition to its investment banking operations owns the Discover credit card business.