Is it Time to Jump Back into the Financial Waters?

The dust that emerged amidst the chaos of the credit crunch has begun to settle and significant signs insinuate that it may be time to get back into financials. These indicators exist in the form of surprising earnings, Goldman Sachs's (GS) stance on distressed assets, Warren Buffet's long-term confidence in financial companies, and opportunities from consolidation.

Deutsche Bank (DB) impressed analysts with its recent earnings announcement. The street expected poor numbers because of the bank's heavy dependence on debt-related products, however, the bank managed to pull in 2007 earnings that exceeded 2006 earnings by 7%; including $1.4 billion profit in the fourth quarter. Like the majority of the investment banks, Deutsche Bank participated in write downs ($1.3 billion) in Q3 '07, however there were no subprime related losses in Q4 '07, indicating that most losses that needed to be accounted for have already been taken care of and priced into the stock.

Goldman Sachs, a company that is legendary for being in the right markets at the right time, has expressed interest in being an aggressive buyer of distressed mortgage and credit assets.

Goldman is also going to continue its investment banking expansion in the middle market sector and sees a good opportunity to become a more aggressive buyer of distressed mortgage and credit assets. Viniar (Goldman CFO) said: We will be a buyer of distressed assets at the right price.

-Financial News Online

Even if the credit crisis has not quite bottomed out yet, Goldman's current interest signifies that they at least believe the bottom is near.

Warren Buffet may be the only investor more coveted by Wall Street than Goldman Sachs. Buffet has made billions on his strategy to "get scared when the market gets greedy and opportunistic when the market gets scared." Buffet's actions in the past few months (spending $6 billion on deals) indicate that he agrees with Goldman Sachs that this is the time to get back into the market. It is widely believed that Buffet is looking to invest in the "oversold" financial or industrial industry. Buffet shared his confidence in the rehabilitation of the US economy on Wednesday Feb 6th when he told the Financial Times,

I'm a bull on the United States. Just think about how silly it would have been to be anything other than a bull on the United States since 1790. It is not a smart thing to sell the United States short over the years - or Canada for that matter. The world does get better. People get more productive. More human capacity is unleashed over time.

-Financial Post

In addition to the possible rehabilitation of the investment banks, there are a number of other exciting investment opportunities in the financial sector. Exchanges have been profiting from the increased volume that has stemmed from the recent market volitility. Additionally, there has been significant consolidation in the exchange sector primarily as a means to combine technology, diversify products and expand globally.

In January 2008, the NYSE Euronext (NYX) agreed to acquire the AMEX in a $260 million all stock deal. This deal is anticipated to close in Q3 '08, and will provide $100 million worth of synergies within two years. The Big Board is expecting earnings to begin increasing in 2009.

The CME Group Inc. (CME) which runs the Chicago Mercantile Exchange and Chicago Board of Trade is also looking to consolidate, and has been involved in merger talks with the New York Mercantile Exchange (NMX). The proposed $11 billion deal would create an exchange of market value $45 billion.

The asset management community continues to take in new assets. The ICI continue to report inflows to mutual funds. This is IRA season and there are additional inflows to these firms seasonally both here and globally.

Wealth creation is a global phenomena and gaining momentum. The BRIC countries and other parts of the developing world are minting millionaires faster that the developed world.

The invest-ability of these trends is something that my firm tracks through the Clear Global Exchanges, Brokers and Asset Managers Index [CGE] which is licensed for the Exchange Traded Fund trading under the symbol (EXB). It may be time to go back into the water, at least with those firms that manage the portfolios, clear the transactions, and facilitate the trades.

Disclosure: Mr. Corn is CEO of Clear Indexes LLC which publishes the Clear Global Exchanges, Brokers and Asset Managers Index. He owns shares of the ETF tracking the index (EXB).

Comments

[SchraderTrader]

There's a lot of noise about the financials having bottomed out. Wouldn't you suspect another test of the lows before that happens? If lows were tested again many investors would see positions decline in excess of 7 - 10% prior to any sort of significant recovery. You also have to factor in the opportunity cost of not profiting from the rally (you'll be riding back to zero from negative). There's also the issue of the bond insurers potentially losing their credit ratings which could cause another round of write downs at major financial institutions.

I agree that the exchanges / brokers sound like a solid idea (NYX, CME, NMX, etc.)

Solid article overall.

[Reinko]

Yes it is time to jump out of the frying pan into the fire! A truly safe bet...

Why not check it out at the Federal Reserve and take a nice look at the h3 release that stores the combined reserves of the US commercial banks?
Look at the column 'non borrowed (3)', there are the non borrowed (read real reserves) parked:

www.federalreserve.gov.../

Does it not say combined reserves are -8755 millions? Thus in the red and about one billion a day declining?

Yes, it is time to get back into the financials...

Andrew Corn, I think you are a weirdo.