Long or Short the Financials?

"JPM’s profit soars 583% year over year" wrote my colleague Keith Fitz-Gerald.

What a difference a year (and $25 billion in government loans) makes. Just as Keith and his cohorts at the Money Map Report had anticipated would happen, JPMorgan Chase (NYSE:JPM) 3Q results were quite profitable – to the tune of 583% more profitable than the same quarter a year ago.

As we recently all read, JPM reported a profit of $3.6 billion dollars, or 82 cents a share in the most recent quarter versus $527 million, or 9 cents a share, from a year earlier. Also, JPM reported a revenue increase of 81% to $26.62 billion.

This earnings report along with last quarter’s earnings report have done a lot to help our JPM position. This banking empire knows how to make money, and if they can't make money they know where they can borrow it for virtually zero interest.

Bloomberg reported this morning that JPMorgan Chase which has navigated the current financial crisis without a quarterly loss (one of the reasons we prefer it over Goldman Sachs (NYSE:GS) is now making more money advising clients on mergers and acquisitions then Goldman Sachs. Unlike Keith, that surprised me.

I suppose there’s more surprises to come now that the proverbial ball is rolling and profits are piling up. This alone might drive the financials higher over the next couple of weeks?

In that vein, Morgan Stanley (NYSE:MS) found its trading touch in the third quarter as well, turning its first quarterly profit since the global financial crisis in late 2008 threatened the very survival of the Wall Street firm.

MS reported a net income of $757 million, compared with a $159 million net loss in the second quarter and the year-earlier profit of $7.7 billion. For common shareholders, the firm had net income of $498 million, a 38-cent-a-share profit that beat analysts' expectations by 11 cents and sent Morgan Stanley shares up earlier today.

Now here's an ETF idea a colleague mentioned to me today (not Keith) that one might want to consider very carefully. It involves the UltraShort Financial Proshares (NYSE:SKF) and Ultra Financials Proshares (NYSE:UYG).

SKF (on the short side) and UYG (on the long side) seeks daily investment results, before fees and expenses, which correspond to twice the daily performance of the Dow Jones U.S. Financials index.

The funds normally invest 80% of assets in financial instruments with economic characteristics that should be twice the return of the index (SKF short, UYG long). It may employ leveraged investment techniques in seeking its investment objective.

This is for very short-term traders who want to attempt to catch a short-term trend in the financial sector. Read and study about them carefully, know about their "holdings" (10 financial stocks make up over half the weighted value of the DJ U.S. Financials index) and realize they use derivatives like "total return swaps" to meet their objectives.

There is "counter-party risk", and like I said, these are meant for short-term, aggressive traders who think there will be volatility in the financial sector and want to capitalize on it. These kind of ETFs are not in any way like typical stock ETFs or investments.

Check out the chart of what SKF and UYG have done over the past 3 months and the second chart is the past 5 days. It is nothing short of educational.


Disclosure: I'm only long one financial stock right now, Citigroup (C) and I haven't personally tried SKF and UYG yet, but I'm getting tempted, especially with SKF.

Comments

[Tony Petroski]

Long, then short.

2009 Oct 22 06:48 PM

[theBuddhist_Investor]

These can also be appropriate for longer-term traders if the trend (up or down) is relatively consistent. If you would have bought SKF in January 2009 and sold in March 2009, you would have done well.

Marc, What is the counter-party risk? Can you elaborate?

2009 Oct 27 10:04 AM