The Financial Sector: Like the Mythical Phoenix

Like the mythical Phoenix, the bird that dies, burns and then rises again from its own ashes, the Financial Sector seems to be rising from its own bed of ashes.

Since making lows on 11/26/2007, the iShares Dow Jones U.S. Financial Sector Index (IYF) has risen 8.6% in five trading days; the iShares Dow Jones U.S. Financial Services Index (IYG) has risen 9.3% and the iShares Dow Jones U.S. Regional Bank Index (IAT) has risen 9.2% as of market close, 12/03/2007.

And these gains come after a long fall of nearly 25% from their summer's peak.

So, what's up? And more importantly, will it continue?

SubPrime Time

Obviously, the fall was precipitated by the subprime melt down and credit crunch that started last summer. Billion dollar write offs from the likes of Citi (C), Merrill Lynch (MER) and Bear Sterns (BSC) aren't good for the health of the financial sector and sub prime players have been punished mightily for their sins.

But now, seemingly overnight, the sector has made a quick U-turn, and Monday, December 3, 2007, Treasury Secretary Henry Paulson, made a huge announcement regarding this whole situation.

Paulson's Treasury Department is negotiating a plan to bail out the sub prime borrowers; a plan with major lenders that would freeze the introductory "teaser" rates that could be announced as soon as this week.

Paulson said that the housing crisis was "the biggest challenge to our economy," as approximately 2 million sub prime mortgages are due to reset to higher rates over the next 24 months.

And politicians are jumping is as well, with Senator Hillary Clinton advocating a 90 day freeze on home foreclosures and a five year freeze on adjustable rate loans. Also joining the chorus is Presidential candidate and Senate Banking Chairman Christopher Dodd who said, "modifications also need to be made available to borrowers who have become delinquent because of loan resets....these homeowners should not be punished because of the abusive loans they were sold.

Flight of the Phoenix?

It's a given that the sub prime debacle and resultant credit crunch have been major drags on the overall market and the financial sector itself.

Paulson's plan offers at least the possibility of some relief to the wave of expected foreclosures and the impact of declining housing prices on consumer confidence and spending.

While no one knows if this rally can be sustained or if the cavalry will arrive in time, the Feds have left the fort and are galloping to the battlefield. Over the next few weeks and months, it will be interesting to see if this Phoenix can fly.

Disclosure: Author doesn't hold any of the stocks/ETFs mentioned in this piece.