On the heel s of the latest moves by the Federal Reserve to lower rates and extend the ranger of collateral accepted for short term lending to banks, the prices of bank stocks have moved up in the recent week. The Keefe Bruyette Bank Index (BKX) has moved from 75 up to 85. Wells Fargo(WFC) has moved from the $28 area up to $32. Even Citigroup ( C ), the poster child for the credit crisis has seen its shares bounce form $18 back up to $23. Should you jump on the bandwagon and buy financial stocks, especially major banks, now before they take off?

Reports out from several major investment firms in the past few days suggest that the answer is a resounding NO. Merrill lynch issued a report today downgrading several large banks including bank of America BAC), PNV Financial (PNC) and Suntrust Bank (STI). The Merrill analysts stated that the banks will continue to feel the impact of the housing markets and this will have a negative impact on both earnings and the value of their existing loan portfolio. Indeed most major investment banks and research firms are lowering their earnings estimates for all the major banks. Usually, lower earnings are going to lead to lower stock prices. In a separate report, Goldman Sachs estimate that total losses form subprime and other mortgage related securities could reach as much as $460 billion before the crisis and resulting asset write downs come to an end. This is far in excess of the earlier Standard and Poors estimate of $289 billion released just a month ago. Banks still face lower earnings prospects and declining asset values and I just cannot see how that can possibly be good for their stock prices.

Banks have enormous exposure to the housing market and it just keeps getting worse. The Case Shiller index of housing prices dropped ny11% last month the most since the index started being calculated in 1987. Additional government reports indicated that prices have dropped the most in one month since 1968. There are over 9 million homes in America that are upside down. Their loan outstanding is less than their equity. It is estimated that over 2 million homes will go into foreclosure in 2008. It does not appear likely that the housing market will turn anytime soon. In a ward, consumers are scare. The Consumer Confidence Index is a t a 15 year low. Even more importantly for real estate activity going forward, the Index of Consumer expectations is at the lowest level since the days of Watergate and stagflation back in 1973. Scared consumers worried about declining house prices and job prospects are not going to be buying a new home in the months ahead.

Government agencies do not seem to think much of he prospect for bank stocks either. The Federal Reserve Bank has created tree new ways for banks to get short term loans. They have expanded the range of acceptable collateral form treasury securities to just about any type of paper the banks can put up to secure funding. In addition, these new methods of accessing the fed balance sheet do not make the banks disclosing how much they are borrowing or how bad a shape their balance sheets are actually in. Fed Chairman Ben Bernake had suggested earlier this year that we may see some bank failures before th current crisis is over. It appears the federal Deposit Insurance Corporation agrees. The agency that oversees the nation's bank insurance program to protect depositors raised its staffing levels by 60% this month to deal with an anticipated increase of bank failures.

The recent move in bank stocks appears to be just a dead cat bounce. Given the current outlook for the economy in general and the housing market in particular there are still tough times ahead for bank stocks

It has not been a good week for bank stocks. The Keefe Bruyette Woods Bank Index (BKX) has fallen about 6% so far this week. The stocks tried to rally for a brief period early in the week but where hit by a wave of analyst downgrades and earning estimate reductions. Merrill Lynch and Goldman Sachs both cut estimates for Bank of America (BAC) citing concerns about further write downs of assets and growing loan losses. The same concerns led Merrill and Sandler O'Neil to cut estimates for Wachovia bank (WB). The reduced estimates caused a sharp drop n share prices with Wachovia off 8% and Bank O f America down 7%.

The big bomb this week was thrown by Oppenheimer analyst Meredith Whitney. Originally last year thought the bearish bank analysts was something of a Cassandra with her drastic forecast for banks. Time has of course, proven her to be correct about the dire straits at the big banks. In her reports this week she said that Citigroup ( C), Wells Fargo (WFC) JP Morgan Chase (JPM) and Bank of America would have to cut their dividends. Her report said "Banks under coverage are dangerously approaching earnings levels that will not support high relative payouts. Beginning with first quarter 08 results, which will be announced in two weeks banks will seriously address their ability to maintain the current dividend level."

She was not upbeat on the immediate future for the sector. Whitney told investors this week, "The best case scenario is that the financial firms take the pain quickly and purge assets form their balance sheets. That could bring stock valuations down as much as 50%, which would be enough that you could legitimately buy long term positions. If they do not purge, there is a slow bleed of capital and pressure on stock prices for an extended period of time. We will most likely see a combination of the two, with more of the latter scenario. It will not be pretty."

Banks continued to shy away for corporate buyout deals this week. Fear of the risks in the highly leveraged deal and concerns about the somewhat shaky shape of their own balance sheets led Citigroup, Deutsche Bank(DB) and Wachovia to back away for financing the buyout of Clear Channel Communications (CCU). Clear Channel, as well as the buyout firms of Bain Capital and Thomas Lee Partners have sued the banks to attempt to force them to put up the capital. For their part, the banks say the lawsuits have no merit. Hearings are being held on the case April 8 in Texas and April 3 in New York courts. As the price of leveraged loans has dropped in 2008, funding the deal could cause losses of up to $2.8 billion for the financing banks.

The outlook for the major banks remains murky at best. There will be more downgrades and losses in the months ahead and this is likely to continue weighing heavily on the shares of the money center banks. It is difficult to make a case for investing in them at these levels.

It has not been a good week for bank stocks. The Keefe Bruyette Woods Bank Index (BKX) has fallen about 6% so far this week. The stocks tried to rally for a brief period early in the week but where hit by a wave of analyst downgrades and earning estimate reductions. Merrill Lynch and Goldman Sachs both cut estimates for Bank of America (BAC) citing concerns about further write downs of assets and growing loan losses. The same concerns led Merrill and Sandler O'Neil to cut estimates for Wachovia bank (WB). The reduced estimates caused a sharp drop n share prices with Wachovia off 8% and Bank O f America down 7%.

The big bomb this week was thrown by Oppenheimer analyst Meredith Whitney. Originally last year thought the bearish bank analysts was something of a Cassandra with her drastic forecast for banks. Time has of course, proven her to be correct about the dire straits at the big banks. In her reports this week she said that Citigroup ( C), Wells Fargo (WFC) JP Morgan Chase (JPM) and Bank of America would have to cut their dividends. Her report said "Banks under coverage are dangerously approaching earnings levels that will not support high relative payouts. Beginning with first quarter 08 results, which will be announced in two weeks banks will seriously address their ability to maintain the current dividend level."

She was not upbeat on the immediate future for the sector. Whitney told investors this week, "The best case scenario is that the financial firms take the pain quickly and purge assets form their balance sheets. That could bring stock valuations down as much as 50%, which would be enough that you could legitimately buy long term positions. If they do not purge, there is a slow bleed of capital and pressure on stock prices for an extended period of time. We will most likely see a combination of the two, with more of the latter scenario. It will not be pretty."

Banks continued to shy away for corporate buyout deals this week. Fear of the risks in the highly leveraged deal and concerns about the somewhat shaky shape of their own balance sheets led Citigroup, Deutsche Bank(DB) and Wachovia to back away for financing the buyout of Clear Channel Communications (CCU). Clear Channel, as well as the buyout firms of Bain Capital and Thomas Lee Partners have sued the banks to attempt to force them to put up the capital. For their part, the banks say the lawsuits have no merit. Hearings are being held on the case April 8 in Texas and April 3 in New York courts. As the price of leveraged loans has dropped in 2008, funding the deal could cause losses of up to $2.8 billion for the financing banks.

The outlook for the major banks remains murky at best. There will be more downgrades and losses in the months ahead and this is likely to continue weighing heavily on the shares of the money center banks. It is difficult to make a case for investing in them at these levels.