Financial Funds Rally on Banks' Results

Financial funds were the top performers among industry groups, as banks reported better-than-expected results.
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Financial-services funds rallied this week as banks including

Citigroup

(C) - Get Report

and

Goldman Sachs

(GS) - Get Report

reported better-than-expected quarterly results, helping company shares rebound from declines of as much as 90%.

The stalling of so-called cram-down legislation in the U.S. Senate may help banks extend gains. The law would enable bankruptcy judges to rewrite all aspects of a troubled loan. Without sufficient votes, the cram-down may be watered down to cover fewer loans or given an early sunset date if a compromise can be reached at all.

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For the five trading days through Thursday, the average financial-sector fund we track gained 2.5%, excluding inverse funds that sell short banks, real estate investment trusts, insurance companies and brokerage firms. It was the best-performing industry group.

Citigroup, up 32% in the five days, recorded a first-quarter profit of $1.6 billion. Ironically, the same mark-to-market accounting philosophy forcing banks to take losses on securities held required Citigroup to book $2.5 billion in unrealized gains on the drop in market value of its own outstanding debt. Goldman Sachs had better-than- expected earnings as a surge in trading revenue outweighed asset writedowns.

The best-performing financial fund this week is the

First Trust Financial AlphaDEX Fund

(FXO) - Get Report

, gaining 8.6%. On top of Citigroup, other holdings include

E*Trade Financial

(ETFC) - Get Report

, up 69%;

Huntington Banchares/OH

(HBAN) - Get Report

, up 54%; and

Protective Life

(PL)

, up 19%.

Bank of America

(BAC) - Get Report

added 8.3% for the week. Bank of America is expected by analysts to report stronger lending from its Countrywide Financial unit when it reports first-quarter earnings on April 20.

The only top-performing financial fund listed below rated as a "buy" is the

Jennison Financial Services Fund

(PUFBX) - Get Report

, benefiting from an international mix of financial institutions. Top-name holdings include

UBS

(UBS) - Get Report

, up 13%;

BNP Paribas

(BNPQF)

, up 9.5%;

AXA

(AXA)

, up 6.2%; and

Toronto-Dominion Bank

(TD) - Get Report

, up 4.8%.

Stress-test results to be reported on May 5 are designed to add confidence to the banking system. This should increase bullish sentiment for the sector going forward.

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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.