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Are financials ready to roll ?

Last two weeks have been very interesting for financials. The KBW financial index is up by nearly 38% - it was up by over 50% but last two days of week, it gave up some of its gains. So that poses a question. Is worst over for financials and are they ready to roll. Let's take a look at some recent events and what's coming up in next few weeks:

  • Many troubled banks have started saying that they were profitable in first two months of 2009. This is good sign considering they were making heavy losses in all of 2008. There would still be significant write downs but there is real possibility that banks can earn their way out of the big hole they have dug. If they can just stop making losses, dilution pressure on their stock would be reduced significantly
  • Mark-to-market is getting revisited. With some relaxation (or different interpretation) would significantly help in terms of capital ratios for banks
  • Geithner is finally ready to roll out long awaited toxic assets plan next week. Since there would be some plan, it would be better than nothing
  • Fed has drawn all its fire-power with last week's announcements and has a great impact on bond/mortgage markets. This is positive catalyst for financials
  • Spring season is here so housing market would start moving again. With mortgage rates at historic lows, we will see activity picking up in housing market which would be +ve
  • Stock prices of financials are still at historic lows and priced for worst. In last two weeks we had seen that small sentiment change would rocket these stocks. Already C, BAC, HIG have doubled from their lows. Preferred of some of the companies (like IGK, IDG, BCS-D, C-M) have done even better
So as investor what should you do ? If you are risk taker, you may want to consider taking small positions in bank preferred shares which are still selling at 40% of their face value (IDG, IGK, BAC-H, BCS-D), insurance companies (XL, HIG, LNC) or ETFs like (XLF, UYG and or FAS)
Note that these three ETFs have returns of 1x, 2x or 3x their underlying index. So invest with extreme caution.

Have a good weekend and good luck in investing

/Shyam

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