The Fed Saves Financial Funds

Friday morning, the Federal Reserve propped up the world stock markets with a 50-basis point cut, to 5.75%, in its discount window rate charged to member banks. It also extended the term of these overnight loans to as long as 30 days, still accepting home mortgages as collateral.

The Fed admitted that tighter credit and deteriorating financial markets "have the potential to restrain economic growth going forward," and "downside risks to growth have increased appreciably."

The FOMC statement also reminded the investing public that the Fed is "prepared to act" to protect the economy from further "disruptions in financial markets."

The rate cut action was held off as long as possible to avoid confirming the perception of economic weakness in the face of recent data suggesting continued moderate growth. Now that the cat is out of the bag, the likelihood increased that Fed Chairman Ben Bernanke will cut the Fed funds target rate, sooner rather than later.

Even prior to the Fed moves, the PowerShares Dynamic Banking Portfolio(PJB Quote) had rebounded off recent lows and turned in a total return performance of 3.25% for the five trading days ending Thursday, Aug. 16.

This ETF is made up of 84% banks, 11% savings and loans and 5% diversified financial services, with the biggest holdings being Northern Trust(NTRS Quote), Keycorp(KEY Quote), Comerica(CMA Quote), Bank of America(BAC Quote) and JPMorgan Chase(JPM Quote).

Two of the holdings contributing to this fund's gain were WesBanco(WSBC Quote), up 19.94% on insider buying, and Amcore Financial(AMFI Quote), up 12.43%, with the announcement of its 97th consecutive quarterly dividend.

In second place, the KBW Regional Banking(KRE Quote) ETF added 3.08% with a portfolio of U.S. stocks allocated to 94.4% banks and 5.6% savings and loans. The position moving up the furthest, Pacific Capital Bancorp(PCBC Quote), jumped 24.24% during the period due to the initiation of a $25 million share-repurchase program.

Pacific Capital Bancorp was also the top-performing holding of our third-place fund, (BKPIX Quote)ProFunds Banks UltraSector ProFund, up 2.98% for the week. This open-end fund is leveraged 150% to the Dow Jones U.S. Banks Index.

Best-Performing Financial Funds Ranked by returns for the week ended Aug. 16
Fund	Ticker	Rating	Fund Type	1 Week Total Return
PowerShares Dynamic Banking Portfolio	PJB	U	ETF	3.25%
KBW Regional Banking ETF	KRE	D-	ETF	3.08%
ProFunds Banks UltraSector ProFund	BKPIX	E-	Open-End	2.98%
PowerShares Dynamic Insurance Portfolio	PIC	D	ETF	2.56%
Senbanc Fund	SENBX	E	Open-End	2.37%
iShares Dow Jones US Regional Banks Index Fund	IAT	D	ETF	1.89%
UltraShort Financials ProShares	SKF	U	ETF	1.77%
Burnham Financial Industries Fund	BURFX	D+	Open-End	1.72%
Regional Bank HOLDRs Trust	RKH	D+	ETF	1.65%
KBW Bank ETF	KBE	D	ETF	1.65%
Source: Bloomberg

Down 21.79%, the First Trust/Gallatin Specialty Finance and Financial Opportunities Fund(FGB Quote) closed trading on Aug. 16 at a discount to its net asset value of 9.43%. The fund has not released its current top holdings information since May 31 when the fund was 96.2% cash and 3.5% capital markets stocks.

Also, with a double-digit loss, the Claymore/Clear Global Exchanges, Brokers & Asset Managers Index(EXB Quote) ETF gave up 13.17%. The fund invests almost exclusively in diversified financial services companies, with the largest holdings being CME Group(CME Quote), Franklin Resources(BEN Quote), Deutsche Boerse AG, NYSE Euronext(NYX Quote) and Goldman Sachs(GS Quote).

The position doing the most damage this week is an Australian hedge fund, HFA Holdings, which boasted about profiting by selling short firms stricken by the subprime meltdown. As some of these financial companies bounced back, HFA sank 26.69%.

Worst-Performing Financial Funds Ranked by returns for the week ended Aug. 16
Fund	Ticker	Rating	Fund Type	1 Week Total Return
First Trust/Gallatin Specialty Finance and Finl Opp Fund	FGB	U	Closed-End	-21.79%
Claymore/Clear Gbl Exchanges Brokers & Asset Mgrs Index	EXB	U	ETF	-13.17%
First Financial Fund Inc	FF	E	Closed-End	-10.55%
Alpine Dynamic Financial Services Fund	ADFSX	U	Open-End	-8.36%
WisdomTree International Financial Sector Fund	DRF	U	ETF	-7.27%
iShares Dow Jones US Broker Dealers Index Fund	IAI	D+	ETF	-6.90%
KBW Capital Markets ETF	KCE	D+	ETF	-6.34%
Fidelity Select Brokerage & Investment Management Portfolio	FSLBX	B-	Open-End	-5.67%
Hartford Global Financial Services HLS Fund	HFIAX	U	Open-End	-4.98%
Morgan Stanley Financial Services Trust	FSVAX	E-	Open-End	-4.98%
Source: Bloomberg

Friday's move by the Fed reassures financial institutions and the public that liquidity will be made available to keep the economy from seizing up and the markets from heading into the great unwind -- where fire-sale pricing begets forced fire-sale pricing.