Are We Seeing a Bottom in the Financial Sector?

Since the financial crisis started last fall, the primary concern of the Fed was to avoid a complete collapse of the banking system. By creating new ways of providing liquidity through Term Auction Facilities [TAF], together with reducing rates, they surely prevented that from happening so far. However they also pumped hundreds of billions of dollars into our economy (in addition to the government stimulus plan). So who will benefit the most of this liquidity?

It is the financial services companies themselves who will be the biggest winners from this. The Fed has opened the door not only to commercial banks but also to investment banks who would like to borrow money and get these mortgage backed securities off their balance sheet. This is a tremendous amount of money that will be funneled to the Financial institutions before making its way to the other sectors of the economy. We have seen previously then when the Fed adds liquidity to the system, it usually takes about 6 to 12 months for its impact to surface in the corporate earning reports. So basically, we might just be seeing the bottom for a lot of the financial institutions at this moment.

Comments

[David Tsao:]

Hard to say if we are at the bottom or not. Short term, I still think there is more weakness ahead. Given that, I got into XLF after AIG wrote down a bunch of their assets. Long term prospects I feel good about XLF.

2008 Mar 25 06:40 AM

[Pj568:]

Please explain, how you remove an asset from your balance sheet by borrowing against it?

2008 Mar 25 08:17 AM

[ItsJustMe:]

PJ568 is correct. You cannot get troubled assets off your books by borrowing more money. All the Fed is doing is keeping them solvent by letting them borrow against the garbage so that the "writedown-buyout-bank... process" is stretched out over several months rather than the catastrophe we almost had last week.

There was an article on Bloomberg yesterday about how Wachovia is dragging their feet on writing down billions of dollars worth of known bad debts and worthless goodwill. The banks and investment companies will be in survival mode until we know the full extent of the housing meltdown over the next year.

My advice is don't be a sucker. When the next Bear Stearns hits the market - and it will - they'll fall much faster than they're rallying...

2008 Mar 25 09:38 AM

[darcydancer:]

ItsJustMe is correct. A lot of the bad news is still hidden.

2008 Mar 25 11:23 AM

[Dwane:]

I bought lots of XLF the Friday before the mess last Monday and I have already unloaded about 35% of it today. I bought it for the long run as I am 100% the financial system will not fall 100% apart. I like the long term for banks but up 15% in a little over a week is not realistic.

2008 Mar 25 08:44 PM