Banks and Brokers Go Boom

The financials are on the move!

Bears and Bulls are getting creamed left and right. The financials, with gigantic short interest going into Monday, have catapulted higher on the back of the latest Fed announcements and the Bear Stearns bail out. Investors short just got blown up. Folks speculating on Lehman Brothers (LEH) demise just got burned by an order of 100% as the stock has more than doubled from its Monday morning low. On the other hand, commodities are under pressure as the dollar has bounced off its recent lows and there is a sense the Fed is finally acknowledging the serious threat of inflation. Investors are finding the going extremely difficult as the market gyrates wildly day-by-day.

Those under-weight and on the side of the crowded anti financial trade might need to reverse course. The way banks and brokers are trading (i.e. blasting off); it might be time to initiate a long position. Prominent investors we know are buying financial related ETFs as a way to spread their exposure and risk across the entire sector. It is hard to predict who the next JP Morgan (JPM) will be. Even the “smartest money” is unable to decipher whether or not Bank of America (BAC) or Wells Fargo (WFC) will be the next beneficiary of the Fed’s golden goose. On the other hand, you don’t want to get caught holding a Bear Stearns, so you need to own the entire sector. The assumption is that there will be winners and losers, but that the trend has changed and the sector can recover from its multi year lows.

The iShares Dow Jones U.S. Financial Sector Index Fund (IYF) would be a logical choice.

It’s top ten positions are:

Bank of America
JP Morgan Chase
Citigroup
Wells Fargo
American International
Goldman Sachs
US Bancorp
Wachovia
Bank of New York Mellon
American Express

Is the Fed serious about inflation? Are they willing to maintain its accommodative stance in an effort to get the U.S. economic engine fired up. Maybe so. If the major sentiment change over the past few days holds course….the ingredients are in place for financial shares to re-cover some of their lost ground. Being completely out of the banks or brokers could prove to be a mistake for those with diversified portfolios going forward.