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


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more