Financial Funds Extend Losing Streak

Financial funds ranked as the worst-performing group for the second week in a row.

Ten of the 19 largest declines among all U.S. funds exclusively focused on the financial industry during the week ending Thursday, Jan. 22. Investors fled financial stocks as fourth-quarter earnings reports revealed the magnitude of the damage to the major banking industry players.

The fallout from Bank of America's(BAC Quote) fourth-quarter loss continued as details of billions in losses from its Merrill Lynch brokerage unit required another $20 billion infusion of U.S. Treasury capital and asset guarantees totaling $118 billion. Merrill's brokerage clients withdrew $10 billion from accounts in the fourth quarter, on top of $3 billion in the third quarter.

Merrill CEO John Thain departed last week after the firm paid billions in bonuses to employees on Dec. 29, just before the sale to Bank of America was completed, and he spent $1.2 million to redecorate his office. In the four trading days under review, fear that Bank of America may need even more capital drove the stock down another 31.4%. Additional government capital infusions risk "nationalization" as the government's share of ownership may exceed 50%.

As expected, the 300% leverage of the Direxion Financial Bull 3X Shares(FAS Quote) and the Direxion Financial Bear 3X Shares(FAZ Quote) generated the largest loss, totaling 38.25%, and the largest gain, 12.20%, respectively. These are continuations of the 40.6% loss and 53.5% advance in these funds reported in last week's article on the dim prospects for financial funds.

Including Bank of America, other members of the Russell 1000 Financial Services Index tracked by these funds hit the skids last week. Popular(BPOP Quote), based in Puerto Rico, doubled its year-earlier loss to $702.9 million in the fourth quarter and chopped its stock price in half, down 49.7% in four trading days.