Financial Funds Slump as Prospects Dim

The worst-performing financial funds for the week ending Jan. 15 lost an average of 13.4%. Inverse funds rose. A lack of confidence in banking shares and uglier-than-expected earnings reports amplified stock declines as Congress approved the second $350 billion in the Troubled Asset Relief Program.

Leverage of 300% against the sector brought an extraordinary 53.5% gain to the Direxion Financial Bear 3X Shares(FAZ). Of course, the effects of leverage also dropped the floor out from under the Direxion Financial Bull 3X Shares(FAS), which lost 40.6% for the five trading-day period.

These were the best- and worst-performing financial-sector funds for the week. The Direxion Financial Shares track the daily performance of the Russell 1000 Financial Services Index.

Of the 207 members in this index, Citigroup(C) led the way down, plunging 46.5% for the period. A reported loss of $8.29 billion has the company planning to split in half and sell off "non-core" businesses such as its Smith Barney brokerage and its CitiFinancial consumer lending unit.

Doubts exist that, during this recession, buyers for the divisions would pay enough for Citigroup to come out ahead on the deals. However, the hope is that by selling off the pieces assembled by former CEO Sandy Weill, Citigroup can improve its capital position and prevent the government from having to take a majority stake in the company.

Shares of another index member, Bank of America(BAC), lost 38.6% for the period in anticipation of Friday's announcement of a $1.79 billion loss in the fourth quarter. A $15.3 billion loss from Merrill Lynch, which Bank of America acquired in January 2009, makes the picture a bit grimmer. Trying to counter the losses, the bank cut its dividend to 1 cent a share and plans to shrink headcount by 35,000 to save $7 billion a year. The $20 billion in first-tranche TARP funds to be received on Jan. 16 will buy preferred shares that have a higher claim on ownership than the common stockholders.