Goldman delivered another hammer blow to financial stocks like Citi (C), Merrill (MER), and Bank of America (BAC) by downgrading the sector to Underweight. Goldman upgraded to Neutral in May on the expectation that financials “would benefit from bank recapitalizations and fiscal stimulus,” but it is now reversing course and gives four reasons why:
- Credit deterioration will not peak until 2009,
- capital raising is becoming harder;
- the consensus range of EPS estimates needs to narrow; and
- a flat yield curve.
Furthermore, Goldman suggests that hedge funds are shorting the sector:
Our holdings data suggest that hedge funds are net short the sector and the fact that only 4 of 42 deals are in-the-money so far means new capital raising is becoming more difficult (and more dilutive).