Outlook Called Not that Bad

A report from a Jefferies & Co. Inc. office here acknowledges that credit and liquidity issues are likely to continue to weigh on financial stocks next year, but they believe many types of loans "will perform better than sentiment suggests."

In Jefferies & Co.'s view, expectations for credit performance overall are "overly bearish."

But how about mortgage loans?

That's not a pretty picture, according to the Jefferies & Co. report. Subprime and alt-A mortgage classes will likely see losses rise to record levels, the New York-based company predicts.

And the number of financial institutions seeking to bolster their capital with outside investments may become a "massive recapitalization" of the financial services sector.

"In contrast to the last decade, we expect that many of the largest financial institutions will seek to enhance their capital positions with external capital. This may pose a challenge for smaller companies needing to access the markets at a time when capital is being raised in multibillion-dollar increments," the report said.

Jefferies & Co. believes that the financial services sector has gone through the worst part of the cycle in terms of stock performance, saying most of the financial names the company covers are currently "priced near liquidation levels," according to the report from Richard Shane, head of the company's finance group.

Mr. Shane and his team of analysts predict that while there is little remaining downside for most of the companies in the financial services sector, the upside may not be so hot either in the short term.

"2008 is likely to be a year where a few stocks significantly outperform while most remain flat," the report said. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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