ETFs

Financials Still Not In the Clear

By Kevin Grewal

Despite stellar quarterly earnings reports by some financial services giants like Goldman Sachs (GS) and JP Morgan Chase (JPM), the financial sector as a whole fares better than it did a year ago, but is still not in the clear.

Most recently, the nation’s largest life-insurer, Met Life (MET), disappointed Wall Street, as it reported a book value short of what was expected.  Many suggest that this was driven by the impact that financial derivatives have on balance sheets and the fact that these financial derivatives, which many blame for the recent financial crisis, is still prevalent in the financial sector. 

To put a further strain on the sector, quarterly earnings by Bank of America (BAC) and Morgan Stanley (MS) both failed to deliver.  Back of America blamed its quarterly losses on the rising defaults in credit card debt and mortgage loans as well as its obligation to pay back borrowed money from the federal government and taxpayers.  As for Morgan Stanley, the company took a hit as it continues to face struggles caused by the credit crisis and tightened its credit spreads which increased liabilities.

Additionally, bank lending, which is generally a huge money-maker, will likely continue to remain tight.  Although most large banks are willing to lend, it all comes down to assessing risk and most lenders are reluctant to extend out a loan to a company who is in the red.  

To put a further strain on the lending front, business demand for loans is likely to remain weak.  Two driving forces behind obtaining business loans are capital spending and inventories, both which are expected to rebound, but at a gradual pace. 

From a political perspective, the threat of regulation on risk-taking that the Obama administration wants to impose on large financial institutions will likely be a downer of the overall performance and health of the sector.  Furthermore, global financial concerns such as the stability and health of sovereign debt and steps taken by China to curb lending are likely to trickle down and impact the sector.

Lastly, concerns of a weak labor force will likely continue to takes its toll on the financials.  According to the latest data from the U.S. Bureau of Labor Statistics, unemployment rates in 371 out of the 372 U.S. metropolitan areas were higher than a year ago. 

On the positive side, things are heading in the right direction.  Initial unemployment claims are said to have fallen and improvements have been seen in non-performing loans, net interest margins and net charge-offs; however, a rough road will likely lie ahead.

Some equities that are likely to be influenced by these forces include:

  • the Financial Select Sector SPDR Fund (XLF), which boasts JP Morgan Chase and Bank of America as its top holdings
  • the iShares Dow Jones US Insurance (IAK), which boasts Travelers (TRV) and Met Life in its top holdings
  • the UltraShort Financials ProShares (SKF), which enables one to bet against the financial sector.

To help mitigate these risks that are likely to face the financials, the use and implementation if an exit strategy which triggers price points at which an upward trend could potentially be coming to an end is important.   Such a strategy can be found at www.SmartStops.net.

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