Financials ETFs: Seven Weeks After 'Cramer's Bottom'

It has been exactly 7 weeks since Jim Cramer made an emphatic call that "financials" had hit rock bottom. He made that prognostication on his Mad Money program on Thursday, January 10, 2008.

With February closing on a sour note... and more subprime write-downs causing today's commotion... I thought it would make sense to revisit Cramer's statement. After all, I expressed similar sentiments in a January article where I discussed the Dow Jones Dividend Index Fund (DVY) as a "bottom-for-financials" beneficiary.

On 1/10, the S&P Select Financials SPDR (XLF) closed at 27.4. Yesterday it closed at 26.7 and today, XLF trades around 26 at the time of this writing.

On the surface, then, it would appear Cramer hadn't quite got it right. Yet, we shouldn't be too hasty in the assessment.

First, the lowest close on XLF since the Cramer call came in at 25.5 on January 18. That suggests that... at least for now... Cramer's call was only 5% from today's close of 25.8. If the closing low from 6 weeks back were to hold up, that would be reasonably impressive.

Second, the XLF has closed as high as 29.7 in the 7-week time frame. That's 8.4% higher than the 1/10 closing price of 27.4. So Cramer's "Buy" is actually priced at the lower end of the range for the sector.

Third, there are other areas of the financial sector that have actually done better since the 1/10 "Cramer Call." The PowerShares Financial Preferred (PGF) is up 3.7% since that time, while the S&P U.S. Preferred Stock Index (PFF) with a 75% financials weighting has garnered 4.7%.

It is not my intention to support or refute Jim Cramer. Instead, I am giving perspective on the accuracy and relative importance of "calls" and "claims."

After all, isn't it important to consider whether or not financial stocks have historic upside potential? How much of the subprime and the write-downs and the potential failures at institutions have been "priced in" by the market already? (After today's AIG-inspired 300 point Dow drubbing... you'd think we have more to price in!)

However, with a forward P/E of 10 for XLF, it's hard to believe a turnaround won't come soon enough. Perhaps it'll come after horrendous Q1 numbers in mid-April. Perhaps it'll come when housing bottoms out.

As for my own preference, I served up the DVY with it's 4.5% annual yield and 40% weighting in financials. How has it done since my commentary?

DVY closed at 62.0 on 1/11. Wednesday, it finished at 62.4, while it figures to close below 60 on Friday's "sell-off".

Comments

[crowdofchee...:]

on what investment/capital will the financial sector in general produce a turnaround? housing isn't actually going to recover for some time. personally i dont see any other real financial engine in the US region.

2008 Mar 02 02:25 PM

[Fighting Yoda:]

Financials along with the market have a long way to go down. Relative to other world indexes our indexes have not gone down at all - recession and subprime are our problems not rest of world (ROW).
Fed has been pandering to wall street (that is their main mandate since Greenspan). Ill timed Fed cuts hamper smooth functioning of the market and are highly disruptive - give out wrong signals - false hopes and the base for the next bubble.

Regarding Cramer - he loves to make calls - he does not care if he right or wrong. If wrong - blame the Fed, else gloat in any temporary glory. Lots of financials jumped - 20 (JPM) - 40% (COF) even 100% in case of WAMU. All are obviously coming back.

Nobody has called any kind of bottom in housing - everyone is predicting protracted doom-n-gloom - but lot of big housing stocks jumped more than 100%. Fed/Cramer inspired irrational exuberance '08.

Stay away from toxic waste, bide your time.

2008 Mar 02 02:32 PM

[HarMegiddo:]

all these PEs are based on forward earnings that are still to be lowered. don't be suckered in by low PEs.
as far as crammer goes. he is a self advertising. money squandering schill. why anyone would want to listen to him is beyond me? simple investigation shows that most of his suggestions are totally backwards.

2008 Mar 02 04:53 PM

[ITVGuy2000:]

Betcha wish you could take that one back. Tomorrow is going to be brutal on the financials.

2008 Mar 02 09:37 PM

[erniem:]

Well, this must be the time to invest in financials, Cramer says so. He is never wrong. I actually will take a few short term financial positions. I do believe we will weather the storm without a meltdown, I doubt we have seen anywhere near the end of the storm. This year will see a sudden falloff in municipal income as property and transfer tax plummet, which will increase debt load, lead to some bankruptcies and further problems (and opportunities in muni bonds), and a decidedly slow year for business. I am not in any hurry to buy financials..

2008 Mar 02 09:37 PM

[BlackSwan:]

Jeremy Siegel put out a strong buy on the financials in October and has repeated it several times since then! Still want to send your kid to Wharton? Subscribe to his weekly letter? Buy his Wisdom Tree products? He makes Cramer look good!

2008 Mar 02 10:27 PM

[helplessobs...:]

Investors so far have failed to recoganize the utter disaster that is continuing in our financial system. Prior troubles were more isolated, this one is like a severe blood disorder where no organ is immune to the toxins. The way muni markets are behaving, unreasonable increases in credit card interest rates, cutting off loans etc. are harbingers of impending insolvency.

2008 Mar 03 02:09 AM

[User 127483:]

What is best way to short the bond market through an ETF?

2008 Mar 03 08:47 AM

[jimsep:]

10x forward p/e for the XLF? How do you know that. None of the managements of any financial or housing related stocks obviously have a clue what they are going to earn.

2008 Mar 03 12:52 PM

[whisperonth...:]

No matter who calls it, we are all responsible for our own actions. Trust only in yourself because you only have yourself to blame. If you play, you pay.

2008 Mar 03 06:58 PM

[HappyBlond04:]

CNBC started calling the bottom of the Financials and Retail about the same time Cramer did.

2008 Mar 03 07:20 PM

[Looking at ...:]

I've been looking at the XLF for 4 months now. However, with March being the largest month of mortgage "resets" by dollar amount, more pain is on the way. I almost bought a portion of my position mid-day today at 25 but I still think its going lower. C is having continuing difficulty and these banks with their off balance sheet SIVs (can you say Enron) can't put a value on their losses.

2008 Mar 04 05:40 PM

[GSH1976:]

This is funny in light of Cramer's bottom call yesterday and his recommendation to sell all financials and homebuilders on 7/14.

1/10/08 the buffoon recommended buying financials - XLF closed at 27.40

7/14/08 the buffoon said to sell financials - XLF closed at 17.72

7/30/08 the buffoon tells everybody to buy financials - XLF closed the day at 21.50

2008 Jul 31 05:18 PM