NEW YORK (
) -- The financial sector has made an astounding recovery from its March 2009 lows, and after
beat expectations by reporting fourth-quarter earnings of $3.3 billion, investors are hoping for more positive earnings headlines this week.
Nevertheless, a close look at JPMorgan's results and broader trends suggest banks haven't completely rounded the bend.
Banks scheduled to report this week include
Bank of America
When analyzing JPMorgan's results, it appears that its profits were primarily driven by its investment banking and trading operations.
On the positive side, the outlook for mergers, acquisitions and initial public offerings (IPOs) is somewhat bright. In fact, a recent study revealed that venture capitalists expect IPO activity and venture-backed funding to increase dramatically in the coming year.
But the bank's trading profits, which in part resulted from the stock market's big run-up in the wake of its March lows, will be hard to repeat now that many investors believe stocks are close to reflecting their true value.
Elsewhere, trends are not too promising for retail financial services operations, which are a huge portion of the financial sector. A weak housing market, high unemployment and shaky consumer confidence continue to take their toll on residential loans as credit losses continue to mount and loan-loss reserves continue to balloon.
In fact, consumer loans are shrinking, and November 2009 showed the biggest drop in consumer credit on record. This can be detrimental to the overall financial performance of financial firms because it is a highly profitable portion of their overall business.
On the commercial side, things are not much better. Many suggest that the commercial real estate sector is going to take a hit in the coming year. Additionally, businesses are reluctant to take out additional loans, which has resulted in a double-digit decline in year-on-year commercial and industrial loans, another huge money maker for financial firms.
Lastly, the special 10-year fee on large financial companies that President Obama is proposing will likely be a depressant for the sector. This fee, which is expected to generate nearly $90 billion over a 10-year period and repay taxpayers for preventing the economy from completely collapsing, will more likely than not eat away at the bottom line of large financial institutions.
In a nutshell, bank earnings will likely be better than they were a year ago, but it appears that they are not being driven by the consumer. And as long as unemployment remains high and consumers refuse to take on credit, the sector will likely have an uphill battle to fight.
Some ETFs to watch as the financial institutions unveil earnings reports include:
Financial Select Sector SPDR
, which closed at $15.25 on Friday.
iShares Dow Jones US Financial Sector Index
, which closed at $54.29 on Friday.
Vanguard Financials ETF
, which closed at $30.51 on Friday.
The financial sector as a whole has been in a nice uptrend, but it is important to keep in mind the risks involved when investing in it. A good to way to protect against these risks is through the use and implementation if an exit strategy using price points at which an upward trend could come to an end.
According to the latest data at
, the price points for the aforementioned ETFs are: XLF at $14.57; IYF at $52.18; and VFH at $29.37. These price points fluctuate on a daily basis and reflect changes in market conditions. Updated data can be found at www.SmartStops.net.
Written by Kevin Grewal in Laguna Niguel, Calif.
Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Additionally, he serves as the editorial director at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.