Financial Funds Sell Off Ahead of GE
Over the last week, the market was quiet, perhaps too quiet. The
Dow Jones Industrial Average
,
S&P 500
and Nasdaq-100 each fell less than 1%. Meanwhile, the financial funds we track were on the move, sliding an average of 3.52% for the five trading days ended Thursday, April 10.
The poor banking sector performance may have been a harbinger of trouble for
General Electric's
(GE) - Get Report
finance unit. Just prior to the end of the first quarter, the financial industry credit seizure forced GE to lower the presumed value of some of its securities held and prevented the sale of other financial assets.
Ultra Financials ProShares
(UYG) - Get Report
tops the worst-performing list this week, losing 8.18%. When financial stocks are contracting in value, being 200% long the Dow Jones U.S. Financials Index is double trouble.
By Thursday, the fund's holding of
The First Marblehead Corporation
(FMD)
hit an all-time low, plunging 42.80% for the period. This student loan securitization company suffered the loss after its bond guarantor filed for chapter 11 bankruptcy on Monday.As a result, First Marblehead's financing arrangement with
Goldman Sachs
(GS) - Get Report
expired without completing a new $1 billion credit deal.
Another fund holding, America's third-largest mortgage insurer,
Radian Group Inc
(RDN) - Get Report
, sliced 21.76% off of its stock price after preemptively asking its lenders to waive the minimum credit rating covenant. Radian's record fourth-quarter loss of $721 million calls into question the company's ability to pay claims prompting downgrade worries.
The
ProFunds Banks UltraSector ProFund
(BKPIX) - Get Report
gave up 7.66%, while the
KBW Regional Banking ETF
(KRE) - Get Report
dove 6.97%. Three stock holdings common to both funds were
Cathay General Bancorp
(CATY) - Get Report
, down 17.30%;
Frontier Financial Corp
( FTBK), down 17.19%; and
Old National Bancorp
(ONB) - Get Report
, down 16.21%. Investors are getting out ahead of expected first-quarter disclosures of rising loan defaults.
For an explanation of our ratings,
click here.
The only financial fund keeping its head above water this week is the
UltraShort Financials ProShares
(SKF) - Get Report
. The fund added 8.61% by being 200% negatively leveraged to the members of the Dow Jones U.S. Financials Index.
Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.