By: Larry MacDonald
Financial stocks in the United States have rallied mightily over the past two months. The table below shows the gains for 5 financial exchange-traded funds (including leveraged ones) since the low of March 6:
iShares Dow Jones US Financial Sector (IYF) 71%
Financial Select Sector SPDR (XLF) 99%
Regional Bank HOLDRs (RKH) 128%
Rydex 2x S&P Select Sector Financial (RFL) 238%
Direxion Financial Bull 3X Shares (FAS) 325%
The U.S. financial sector could add to these gains but longer term it’s not obvious to me it is a sector to which one would want to give a lot of weight in their portfolio. There are two main reasons why.
First, those business models that gushed earnings during the boom era seem somewhat busted now. It’s difficult to see many of their tainted product lines, such as asset-backed securities, regaining the popularity they once enjoyed. Moreover, legislators will likely bring in regulations to tame financial innovation and temper other aggressive practices. And regulators will probably be a lot less tolerant of non-compliance. Finally, the Federal Reserve has learned that it needs to keep not only consumer prices under control but also asset prices — so once the economy has climbed out of its current hole, monetary policy should be run more conservatively (which means less credit creation for the banks).
Second, even if the above analysis ended up wrong, I still would not want to have anything to do with the big financial conglomerates in their present form. Another argument for avoiding them is one that believers in socially responsible investing (SRI) may be able to identify with. SRI abstains from investing in companies that harm society, the classic example being tobacco companies. I would add to that list many of the big financial conglomerates.
They unleashed a severe financial crisis and recession on the world. What immense harm they have caused — and could do again if they are allowed again to operate unfettered. Not only that, but look at the trillions of dollars taxpayers had to give to them. They have socialized the losses and privatized the gains. I personally would find it repugnant to invest in their shares.
The sustainability of the U.S economy requires a halt to the relentless climb in indebtedness, if not a lengthy period of deleveraging. Investing in the big financials would only lend support to unhealthy trends. The pusher has to stop selling his drugs to the addicts.
2 Responses to “ U.S. financial stocks ”
Regardless of one’s personal views about the evils of bank CEOs and the American financial system, the only way to make money in the financial sector is to join them in their game. There is no doubt the banks are only out for themselves. As an example, I had to go to my TD Bank and pratically threaten my banker so that she will roll back the interest rate on my line of credit which was increased for no reason other than to rip off the unsuspecting customers. That’s why banks will make record profits as the spread between their cost of funds and what they can charge their customers has never been this good. It’s practically a licence to print money. And even as they contine to write off their bad investments, they will continue to make record profits which will over time revitalize their balance sheet. That’s why bank stocks as a group are up. And there has been daily opportunities to get in on financials since early March. That’s the only way to recoupe some of the losses of the past year. I made the mistake of listening to experts who were scaring the public from buying financial stocks. The real evil and corruption I believe is that these media commentators have cost me lots of money; I sold too early my financial stocks which as you have illustrated have gone up a few hundred percent over the last 2 months. If one does not invest in financials for the reasons you outlined, we will be left with fewer sectors to invest in and fewer opportunities to recover our losses.
By John Gan on May 6, 2009