Financials ETFs: Is the Credit Crisis Really Easing?

T. Rowe Price, one of the leading no-commission fund providers, posted its 20th straight quarterly increase in earnings. Not surprisingly, T. Rowe shares (TROW) were up as much as 10% last week.

"Invest in the company's shares, not the mutual fund." That's what a wise person once wrote years ago. And never has the advice been more prescient than when it comes to T. Rowe Price.

The company itself is up roughly 200% over the last 5 years; meanwhile, its flagship fund T. Rowe Growth Stock [PRGFX] amassed somewhere in the range of 11% annualized.

Yet the more important news came from the top brass at T. Rowe; that is, CEO Jim Kennedy explained in a telephone interview that the credit crisis is easing.

He's not the only one. The one man in history that at one time had actually beaten the S&P 500 on a risk-adjusted basis for 15 years, Bill Miller of Legg Mason Value (LM), addressed shareholders in a letter dated 4/23/08. He wrote, "...by far the worst is behind us. I think the credit panic ended with the collapse of Bear Stearns, and credit spreads are already much improved since then. If spreads continue to come in, the write-offs at the big financials will end, and we may even have some write-ups in the second half instead of write-downs."

Okay... so this isn't the first time that big thinkers have said the worst was over. Uber-picker Jim Cramer made the same claim in early January. Clearly, he was a little early on the call. Others like billionaire Joseph Lewis had begun to acquire more shares of Bear Stearns (BSC) in the summer of 2007, only to find himself out some of his fortune.

Yet there may be reasons to believe that this rally is for real. Major insurers like Travelers (TRV) and Aflac (AFL) beat first-quarter estimates and raised full-year forecasts. And analyst Robert Baird upgraded Zions Bancorp (ZION).

Granted, some 2/3 of banks have missed highly discounted expectations. Nevertheless, "Stearns-like" bombs have not fallen from the sky. Perhaps the worst sector is coming back to life.

How might you profit from a revival? I've been pretty straightforward as to my preference for the iShares Dow Jones Dividend Fund (DVY) and the iShares Preferred Stock Index (PFF.) (Read more on these recommendations from my previous posts.)

That said, these are hardly the most assertive choices for more aggressive believers. Brokerages have been beaten down more than nearly any financial subsector, making the iShares Broker-Dealer Index Fund (IAI) worthy of a bottom-fishing expedition.

For those who might be intrigued by diversifying financial risk globally, there's the iShares Global Financial Fund (IXG). I discussed IXG in greater detail here.

Comments

[kkin365:]

I read in today's (4/28/08) Financial Times that, for the 1st quarter 2008, 24 out of the top 25 mutual funds had an outflow of funds (to the tune of $100 billion). Only Pimco's bond fund (among the top 25) showed an inflow. What do you say to that?

2008 Apr 28 09:10 AM

[John Pseudonym:]

I say people are sheep and they are scared.

I say we will see big swings of emotions which will be evident in stock prices.

I say the days of borrowing to live a life style you can't afford with your income are over.

I say that if the day comes when people turn to their last bastion of wealth (401k money) to "keep up with the Joneses" or make their payment, the stock market is in real trouble.

Suzy Ortman (spelling?) was on Larry King and she's been dealing with callers asking if it's a good idea to tap IRA/401k money in order to stave off bankruptcy...

Her answer was no, but I have a feeling there are a lot of desperate people looking for money...

2008 Apr 28 09:50 AM

[Lilguy:]

I can't disagree that companies--financial and otherwise--are beating estimates this quarter. I believe the number among reporting S&P companies is on the order of 60% beat earnings and 27% underperforming. That's a major reversal from last quarter's horrible performance by analysts.

Does that mean the market is turning or does it mean that the analysts are coming closer to reality in the assessments? I don't know.

What really sunk the financials the last two quarters was the massive uncertainty about the size of the bad debt they held, starting with mortgages and going through all the derivatives, and the Fed's response to the unknown financial hazard. The BSC bailout seems to have re-assured the financial sector that the Fed will come to the rescue when there is a systemic risk. At the same time, the size of the mortgage-related debt has now generally been assessed at a half-trillion dollars--give or take--by Goldman-Sachs and others. More importantly, it gives investors confidence (possibly unwarranted) that they can see the end of writeoffs since about half of that sum has already been written down.

But is the assessment correct?? Will the bad mortgage number get worse? Will there be a spillover into non-mortgage derivatives? Will the separate, but real, decline in consumer purchasing power from food and fuel inflation and stricter lending prevent the expansion of credit?

I dunno, but I won't be the first on the financials bandwagon.

2008 Apr 28 11:53 AM