Those who thought that Citigroup's (C) - Get Report stock couldn't possibly fall any lower were subjected to a gigavolt jolt of reality this past week. The same was true for believers that Freddie Mac (FRE) was somehow insulated from the subprime mortgage contagion and that its "implicit" federal backing would immunize its stock from swooning.
Freddie and Citi, along with ample help from others in the same lines of business, drove funds in the financial sector sharply lower during the week ended Thursday, Nov. 22.
One element for which investors in that sector could show gratitude on Thanksgiving was that it was a day they could be completely confident that the value of their holdings wouldn't persist their relentless movements of the retrograde sort.
Citi's latest stumble followed a downgrade from "neutral" to "sell" by influential
analyst William Tanona.
If it weren't bad enough that the banking giant remains essentially leaderless following the ouster of CEO Charles Prince III, Tanona estimated that it would suffer write downs of $15 billion from its exposure to collateralized debt obligations.
Citi had previously announced that it expected to take hits in the $8 billion to $11 billion range because of likely devaluation of questionable assets. Tanona raised the possibility that the financial colossus might slash its dividend by more than a third to help cover its financial shortfalls.
On Nov. 20, Freddie's shares imploded $10.76 to close at $26.74. The 29% one-day collapse was triggered by the mortgage behemoth's announcement of a $2.03 billion deficit for the third quarter.
Freddie said it is seriously considering slicing its fourth quarter divided by 50%.
Although the headlines focused on Freddie, the entire mortgage finance sector was dragged lower.
Franklin Credit Management
crumbled 86.0% for the week;
sank 42.58% during the truncated week for a worse setback than Freddie's loss of 39.99%. Both Fan and Fred have lost more than half their respective share values in less than four weeks.
By any measure, it was one brutal week for the financials.
The Dow Jones financials index retreated 8.18% during the week, dragged down by a setback of 9.37% in the banks subindex and a deflation of 37.47% in the gauge's mortgage finance component.
The only financial fund to escape the bloodletting was of the "inverse" variety that moves counter to the group. The
ProShares Ultra Short Financial ETF
vaulted 21.78% for the week, thanks to its investment in "swap" derivatives in the Dow Jones U.S. financial group.
The fund is leveraged to move in the opposite investment of the financials at twice the amplitude of movements in the group.
Second spot on the top performer's roster went to a fund whose claim to fame was to retreat less than any of its financial fund colleagues.
First Trust/Gallatin Special Finance & Financial Opportunities Fund (FGB) limited its damage for the week to a relatively modest 3.09%. Its top holdings are
Apollo Investment Corp.
Gramercy Capital Corp.
On the other side of the coin, seven of the 10 worst-performing financial funds suffered double-digit setbacks.
Almost a mirror image of its inverse sibling, the
ProShares Ultra Financials ETF
collapsed 18.49%. The fund moves in tandem with the financials group but at double the velocity. Its biggest holdings are
Bank of America
Next deepest in the minus column was the
Fidelity Select Home Finance Fund (FSVLX), off 16.19% for the week. Its biggest investments are Fannie Mae and the beleaguered
Richard Widows is a financial analyst for TheStreet.com Ratings. Prior to joining TheStreet.com, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.