Financial Funds Slump as Prospects Dim

Banks' worse-than-expected losses and cash crunches deal the sector a body blow, dragging down mutual funds and ETFs.
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The worst-performing financial funds for the week ending Jan. 15 lost an average of 13.4%. Inverse funds rose. A lack of confidence in banking shares and uglier-than-expected earnings reports amplified stock declines as Congress approved the second $350 billion in the Troubled Asset Relief Program.

Leverage of 300% against the sector brought an extraordinary 53.5% gain to the

Direxion Financial Bear 3X Shares

(FAZ) - Get Report

. Of course, the effects of leverage also dropped the floor out from under the

Direxion Financial Bull 3X Shares

(FAS) - Get Report

, which lost 40.6% for the five trading-day period.

These were the best- and worst-performing financial-sector funds for the week. The Direxion Financial Shares track the daily performance of the Russell 1000 Financial Services Index.

Of the 207 members in this index,


(C) - Get Report

led the way down, plunging 46.5% for the period. A reported loss of $8.29 billion has the company planning to split in half and sell off "non-core" businesses such as its Smith Barney brokerage and its CitiFinancial consumer lending unit.

Doubts exist that, during this recession, buyers for the divisions would pay enough for Citigroup to come out ahead on the deals. However, the hope is that by selling off the pieces assembled by former CEO Sandy Weill, Citigroup can improve its capital position and prevent the government from having to take a majority stake in the company.

Shares of another index member,

Bank of America

(BAC) - Get Report

, lost 38.6% for the period in anticipation of Friday's announcement of a $1.79 billion loss in the fourth quarter. A $15.3 billion loss from Merrill Lynch, which Bank of America acquired in January 2009, makes the picture a bit grimmer. Trying to counter the losses, the bank cut its dividend to 1 cent a share and plans to shrink headcount by 35,000 to save $7 billion a year. The $20 billion in first-tranche TARP funds to be received on Jan. 16 will buy preferred shares that have a higher claim on ownership than the common stockholders.

Fourth-quarter results


Marshall & Ilsely


illustrated the dire threat to banks' "capital from loan charge-offs and the difficulty in using TARP capital infusions to quickly increase lending and stimulate the economy, the way Congress wants," said Philip van Doorn, Ratings' senior banking analyst. This financial index member lost 34.8% in one week.

The second-worst-performing fund last week was the

Rydex 2X S&P Select Sector Financial ETF

(RFL) - Get Report

, whose 200% leverage generated a loss of 32.2%. Aside from the three stocks mentioned above, the holding that suffered the largest percentage decline was

Huntington Bancshares Inc/OH

(HBAN) - Get Report

, off 38.9%. Huntington's next CEO, Stephen Steinour, who starts in March, scared investors by suggesting that dividend cuts or new capital infusions are "on the table."

Another Rydex holding,

Genworth Financial

(GNW) - Get Report

, off 33.5%, missed a deadline to qualify for TARP funds as the Office of Thrift Supervision continues to sit on Genworth's application to become a savings & loan. Down 33.3% last week,

Fifth Third Bancorp

(FITB) - Get Report

, with $3.4 billion in TARP-owned preferred shares, a dividend shrunk down to a penny and two consecutive quarterly losses, is eliminating bonuses for its top 50 executives.

Lastly, I would like to compliment the people who wrote the earnings release for

First Horizon National

(FHN) - Get Report

, which lost 28.8% in shareholder value last week. The writers characterized the bank's $55.7 million fourth-quarter net loss as "Strategic Progress," as it "successfully continued implementation of its business repositioning efforts."

Van Doorn explained

the company's optimism and share price rebound as it "beat Wall Street's dim expectations for the fourth quarter."

Inverse fund

ProShares UltraShort Financials

(SKF) - Get Report

popped 34.7% on 200% leverage, while the unleveraged

ProShares Short Financials

(SEF) - Get Report

gained 16.6%. Like the Direxion Financial Bear 3X Shares mentioned above, these highly volatile securities may be utilized for short-term trading strategies but are not recommended as long-term holdings even in a bear market.

For more information, check out an

explanation of our ratings


Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by, 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.