This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

2 Financial Stocks for the Second Quarter

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Ivan Martchev for InvestorPlace

NEW YORK ( InvestorPlace) -- The S&P 500 Index was up 12.59% in the first quarter, with banks coming in as the best-performing sector, up 21.46%. Naturally, the question arises: Should investors chase the Financial Select Sector SPDR (XLF) for the rest of the year, given that this great start in 2012 might signal this once-glorious group's long-awaited comeback?

My answer: not aggressively.

In a previous outlook on financial stocks reviewing the first quarter and providing outlooks for the second, it was the equivalent of feeding a juicy T-bone to a hungry carnivore. But I prefer taking a top-down perspective because a bottom-up approach to big banks isn't as productive now given the financial system's current situation. Enterprising minds might want to click on the links to the relevant monetary indicators in the text.

As a matter of strategy, I believe long-term investors should avoid most large banks in developed markets. Many of these are good "trading" stocks -- they go up for a few quarters at a time, and then those rallies tend to unwind. So, you can trade them, but you must be careful not to overstay your welcome. That's because the record levels of financial system leverage in the developed world hit a wall in the Great Financial Crisis and have been coming down ever since.

Also See: Best (and WORST) Dow Stocks of Q1

In the U.S., total debt as a percentage of GDP as measured by the Federal Reserve Flow of Funds Accounts has slid from 385.7% in the first quarter of 2009 to the present 354.7%.

The financial system is deleveraging despite the Fed's pregnant balance sheet balance and Washington's deficit spending. Aggressive monetary and fiscal measures have not produced any sharp inflation as the M1 money multiplier -- a measure of how fractional reserve banking in the U.S. creates system-wide credit -- is plunging, as are the velocities of M1 and M2 money supply measures.

Also See: 3 'Editor's Picks' for April

Think of this in the following way: Because money turns over more slowly and is being hoarded, you have to increase the quantity of excess reserves and seed credit in the system to keep the total amount of credit -- the old M3 measure of money supply that is no longer reported but still can be extrapolated using current Fed data -- from going down and creating deflation.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
AAPL $126.92 -1.30%
FB $81.69 0.98%
GOOG $577.13 0.66%
TSLA $202.82 0.19%
YHOO $44.04 0.11%

Markets

DOW 18,146.89 +49.99 0.28%
S&P 500 2,101.67 +3.14 0.15%
NASDAQ 4,984.6920 +17.5510 0.35%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs