The S&P Financials has given up approx half of yesterday's gains as European issues led to a broad selling of the group. The selling pressure began when France posted its industrial production number at 2:45am this morning. The country missed expectations which was cause for concern as market participants have been viewing the countries growth forecasts as being overly optimistic. Speculation that it's AAA rating was in jeopardy caused shorts to attack financials as the market playbook remains, 'when there is fear, short financials'. The selling increased as rumors regarding Societe Generale being in trouble and an emergency meeting by French officials made its way around desks. The U.S. financials did not stand a chance.

The parade of defenses came out. First with S&P and Moody's both affirming their AAA rating on the country. Then French officials came out denying there was an emergency meeting, saying the meeting was planned weeks ago and was just to discuss a possible banking tax. Hardly a positive but certainly better than the alternative. Then Jamie Dimon took to the air waves for a second time in less then 24 hours to defined the industry. Coming up is a highly anticipated interview between Fairholme Capital's Bruce Berkowitz and BAC's CEO Brian Moynihan. Market reaction should be interesting but in our view it will end up being a non-event as there is little new information likely to be offered. The group itself remains attractive in terms of valuation if we were in a normal environment. Unfortunately we are not in that environment and as long as the playbook remains 'when in doubt short financials' it will be a bumpy ride for investors.

News of Note:

1) Compass Point says Bank of America's (BAC) proposed settlement on representation and warranty claims on Countrywide RMBS, as well as disclosure by the company of Fannie Mae increasing their requests, has led to many questions surrounding total future mortgage repurchase losses to BAC. The firm has updated their ests in order to take into account recent developments. They say in their base case scenario, total future repurchase losses of $43.5 bln or $25.7 bln above reserves. In their best case scenario, they est total future repurchase losses of $28.4 bln or $10.6 bln above reserves. Firm says in their worst case scenario, they est total future repurchase losses of $62.2 bln or $44.4 bln above reserves. They expect a continued increase in repurchase activity for both GSE repurchases and private label repurchases.

2) RBC this morning noted that the recent sell-off was driven largely on fear and, as a result, rebounded the next day. During these times it is important to remember that bank fundamentals are strong and they believe they are getting stronger. Investors should stay focused on fundamentals and where current valuations lie. Though they have been wrong this year on their bank stock thesis, they continue to believe investors should be buying the bank stocks. If the economy does not encounter a recession over the next 12-18 months banks stocks have 50-100% upside potential from existing prices.

3) Ticonderoga notes, last night, MBIA (MBI) reported Q2 adjusted pre-tax income of $161 mln ($0.80 per share) against its est for a loss of $81 mln or $0.41 per share. MBIA's result was far better than firm estimated because the co was able to commute $8.7 bln in gross insured CDO exposure for an amount less than what they had set aside resulting in a "gain" of some level. This gain was partially negated by a $233 mln addition to CMBS loss reserves. National Public Finance reported good results confirming its view that public finance losses will not produce large losses for the financial guarantors. Firm continues to believe MBIA will ultimately win its transformation lawsuits if they ever actually get to a courtroom. It may be more likely, however, that the remaining plaintiffs drop their transformation challenge once they are able to come to a fair commutation agreement with MBIA.

4) Capital One (COF) announced a definitive agreement under which it will acquire HSBC's (HBC) domestic credit card business, including its ~$30 bln credit card portfolio, for an 8.75% premium to par value of all receivables. As of June 30, 2011, the premium would have totaled $2.59 bln. Despite the expected addition of ~$30 bln of HSBC credit card loans, the co does not expect a significant increase in total assets. The transaction is expected to deliver high teens GAAP and operating EPS accretion in 2013. The transaction is expected to deliver an IRR greater than 20 percent, return on invested capital greater than 25% in 2013, and an improvement in return on tangible equity of ~400 basis points in 2013. While the transaction is expected to result in dilution to tangible book value per share, the strong accretion to EPS will result in an expected earn-back period of four years.

5) Meredith Whitney on CNBC notes that BAC is trading at 50% of tangible book. Says they're not going to go bankrupt, but they just aren't growing. She believes Monday's move in BAC was like Feb 2009 -- it didn't make any sense. Believes big banks should at around tangible book, but not 50% of tangible book.

6) UBS upgraded All State (ALL) to Buy from Neutral saying the recent sell-off has improved the risk/reward for this under-loved stock. Potential catalysts include improvement in homeowners' insurance margins, resumption of auto policies in force growth, and better-than-expected auto insurance loss costs.

7) Compass Point upgrades Comerica (CMA) to Buy from Neutral saying they have historically maintained a positive bias on shares of CMA though the sell-off have given them the opportunity to become more constructive. While many financials screen cheap in the recent sell-off, they believe CMA offers an attractive risk/reward. Specifically, the stock is trading at 0.8x TBV (0.9x including SBIB), has ample capital, is levered to growth in C&I lending and has little exposure to tail risk in residential housing.