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

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 |  Includes: PFF, XLF
by: Gary Gordon

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 (NYSEARCA:DVY) as a "bottom-for-financials" beneficiary.

On 1/10, the S&P Select Financials SPDR (NYSEARCA: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 (NYSEARCA:PGF) is up 3.7% since that time, while the S&P U.S. Preferred Stock Index (NYSEARCA: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".