U.S. Financial Stocks: Just Say No

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.

Comments

[j-dub:]

The public does not want to participate in the market any time soon.
They have been screwed one too many times already. Many are done with the stock market, never to return.


On May 07 03:35 AM Freya wrote:

> You may be right long term, but short term, the Public has Not participated
> in this move. Short squeeze plus program trading is all.
>
> I have a question for you, how would you have handled the Collapse
> of the Financial Markets and the subsequent Deflationary Spiral?
>
>
> You criticize what has been done, what would you have done?

May 08 06:17 PM