FINANCIALS - THE XLF IS IN A BULLISH FORMATION

Our Financials analyst Josh Steiner has posted some important notes over the past few days.  I am summarizing some of his thoughts and highlighting two charts that warrant close attention.

 

First, at Hedgeye Risk Management, we think the Fed is behind the curve and that it's now just a matter of time before the Fed begins raising rates.  As Josh pointed out “while on the surface this would seem negative for Financials, in fact it has historically been a positive sector indicator.”

 

Second, headed into the 1Q10 earning season part of the industry is well positioned.  On Thursday, in a post entitled “XLF SECTOR THOUGHTS AHEAD OF 1Q EARNINGS”, Steiner states, “To summarize, we think the big banks, as a group, should fare better than the small banks in first quarter earnings. That said, going into 4Q earnings, the stocks were coming off a down 3.6% quarter for the XLF. This quarter, the XLF is coming off a +10.8% move to the upside with a more mixed profile. Margins should be better sequentially, but it looks as though reserve builds may be slightly higher than last quarter. Earning assets will be down comparably with last quarter and ASF marks should be slightly better.”

 

“On the small cap side, margins will be better, but credit should be worse, earning asset growth will accelerate to the downside and ASF marks will not be the tailwind to capital they were in 4Q09. Conclusion: we think much of the good news associated with earnings is already priced into the sector at large, but the big banks should outperform the small banks.”

 

Third, the XLF is in a BULLISH FORMATION and below are the current Hedgeye Risk Management levels on the XLF.

 

FINANCIALS - THE XLF IS IN A BULLISH FORMATION - xlf1

 

On the margin front, the environment has clearly improved further for the sector.  As the following chart shows, the 2-10 yield spread - a good proxy for the sector at large - pushed higher to an average 280 bps in the first quarter, up 22 bps from the 259 bps average in 4Q09.

 

FINANCIALS - THE XLF IS IN A BULLISH FORMATION - yield chart

 

FINANCIALS - THE XLF IS IN A BULLISH FORMATION - xlf

 

Howard Penney

Managing Director