Financials: 3 Reasons For a 2008 Recovery

Uber-stock-tracker Cramer called a bottom in financials on 1/10/08. And on this particular point, I do believe he got it right.

The Financial Select Sector SPDR (XLF) on 1/10 registered 27.41. And while the sector has closed as low as 25.50, that was the day the Fed gave the world the 3/4 emergency rate cut. The Fed followed up with another 1/2 point cut, and XLF is currently trading 6.5% higher than it traded on 1/10/08.

Could we revisit the lows of 25.5 on the Financial Select Sector SPDR (XLF)? Yes, we might. There's enough bad news on the horizon that could easily scare folks over the next 3 months.

Nevertheless, no other sector of the economy stands to benefit in 2008 than the financial sector. And here's why:

1. Consolidation. Citigroup has received billions in cash infusions from sovereign wealth funds. B of A is purchasing Countrywide. JP Morgan (JPM) stands at the ready to pick up WAMU (WM). Bear Stearns (BSC) may be taken over by wealthy individual investors like Joseph Lewis. Money is pouring back into Merrill from Singapore. You simply don't get this kind of interest in U.S. financial institutions unless stock prices have nearly bottomed out.

2. Warren Buffett. Does anyone really doubt that the man knows what he is doing? Buffett has made "jillions" by acquiring scraps of broken businesses at or near a bottom. Warren intends to partner with a beleaguered bond insurer or buy one outright or start his own. All told, that means there's a profitable future in bond insurance.

3. Aggressive Rate Cuts. There's far too much skepticism about the viability of rate cutting to stimulate a broken financial system. Pessimists explain that it won't encourage lenders to lend, leaving small businesses and consumers unable to benefit. Puhhhhhhhhleeeeease. The number of people who have asked me about refinancing alone tells me that the rate cuts will help the financial sector. And with banks able to borrow at increasingly attractive rates, they're going to want to make money. Nobody makes more money than the financial sector in a rate slashing environment.

I mentioned before that my favorite way to benefit from a resurgence in financials is to take some of the risk out of investing in the sector at large. Instead, I have 3 favorite opportunities, all of which may be less volatile than the Financial Select Sector SPDR (XLF).

First, I have already profited handsomely from a return to the iShares Dow Jones Select Dividend Index (DVY). A 40% weighting in financials and a 4.25% annual yield make DVY rather appealing.

Second, preferred stock assets have been long overlooked. And quite frankly, utterly dismissed. The fact that 75% of the iShares S&P US Preferred Stock Index (PFF) are financial preferreds contributed to the 2007 slide. Yet the gains in 2008 and the 9%+ yield make PFF an exceptional consideration.

Finally, and I know it may seem boring, but Vanguard's Total Stock Market Index (VTI) struggled in 2007 because of the financial drag. Financials do represent the largest component of the U.S. total market... greater than a 20% weight.

However, it is the financial component of VTI that is keeping the current price of 138 on 2/1/08 close to the 139 level of 1/10/08. Indeed, if the U.S. market is going to move higher in 2008, you better believe it will be on the backs of the the financial segment of our economy.