Financial stocks have led the market rally since Feb. 8th low. Lately, they are under pressure as the whole sector has been in an oversold state for a while. Note that “today marks the last offering of six-month funds from the European Central Bank to banks, while in the US, the Federal Reserve will stop buying residential mortgage-backed securities.” Here, I have done some preliminary technical analysis about ProShares Ultra Financials (NYSEARCA:UYG) and its top 6 holdings (courtesy of XTF.com): JP Morgan (NYSE:JPM), Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), Citigroup (NYSE:C), Goldman Sachs (NYSE:GS) and Berkshire Hathaway (NYSE:BRK.B) (again, chart courtesy of StockCharts.com).
With central banks winding down the cushion created for the credit crunch, it is hard to image how banks could achieve profit margins as high as last year. With 50% real estate mortgage assets on their balance sheet, banks will earn much less down the road. Reduction of mortgage loan principals, pioneered by Bank of America recently, simply signals another run of mortgage write-downs (or bank profit contraction) near the horizon. Note that it is a downward spiral, as loan principal reduction pushes potential home buyers to the sideline and further depresses house prices.
Disclosure: Long SDS, long FAZ