Shadow and gloom were forced aside last week as the masters of the banking industry decreed that 2009 would be a profitable year for their banks.

All three CEOs, Vikram Pandit of Citigroup ( C), Jamie Dimon of JPMorgan Chase ( JPM) and Kenneth Lewis of Bank of America ( BAC), shined a light on their preliminary results of profits in January and February.

Their confidence sparked rallies of 64%, 37%, and 85%, respectively, in their company's share prices. This spread to a relief rally across the financial sector, with the average financial fund tracked by TheStreet.com Ratings jumping 23%, excluding inverse funds, for the five trading days ending Thursday, March 12.

The gains were magnified by severely depressed starting points. By way of comparison, the optimism that Armageddon has once again been postponed added 10% to S&P 500 Index, 8.4% to the NASDAQ 100 Stock Index and 8.6% to the Dow Jones Industrial Average.

Suddenly, Bank of America's Countrywide acquisition nightmare is being hailed by the company's head of mortgage and home equity origination unit, Barbara Desoer, as "really paying off for us" with added capacity to capitalize on the refinance boom spurred by lower interest rates. Freddie Mac's reading of the average 30-year fixed-mortgage rate shed 143 basis points to 5.03% from late last year.

Citigroup Chairman Richard Parsons described his company as "one of the better capitalized banks in the world," in explaining that Citigroup wouldn't need more government capital, thus making nationalization unlikely. Another sign of confidence came from required filings by Citigroup executives buying Citigroup stock at very cheap levels last week. Director Roberto Hernandez's 6 million share purchase and Citi Latin America CEO Manuel Medina-Mora's 1.5 million new shares have open gains of $2.5 million and $645,000 in just a few days. The theory is that insiders have the best view of what a company is really worth, so their purchases are considered a bullish signal.

Billionaire, individual holders of financial institutions are expressing support as well. Prince Alwaleed bin Talal of Saudi Arabia, the third-largest holder of Citigroup behind State Street ( STT)and Barclays ( BCS), has no plans to sell, according to Forbes. And Warren Buffett appears to have increased Berkshire Hathaway's ( BRK.A) ownership stake in Wells Fargo ( WFC) since year-end. Berkshire is the largest holder of Wells Fargo, which gained 72% for the period under review.

As usual, the 300% leveraged Direxionshares Financial Bull 3X Shares ( FAS) and Direxion Financial Bear 3X Shares ( FAZ) bookended the group with an amazing 84% expansion on the bullish side and a breathtaking 58% drop for the bears.

In second place, at 150% leverage, the ProFunds Banks UltraSector ProFund ( BKPIX) rebounded with an extraordinary 72% return.

The second-worst performer two weeks ago became the third-best performer last week. At 200% leverage, the Rydex 2X S&P Select Sector Financial ETF ( RFL) flew 61%.

The table below has been expanded to the top 25 financial-fund performers to show that the large returns extend past just the leverage funds.

Best-Performing Financial Funds for the Week Ending Thursday, March 12
Fund (Ticker) Rating
Fund Type
1 Week Total Return
Direxionshares Financial Bull 3X Shares (FAS) U
ETF
83.64%
ProFunds Banks UltraSector ProFund (BKPIX) E-
Open-End
72.16%
Rydex 2X S&P Select Sector Financial ETF (RFL) U
ETF
61.18%
ProShares Ultra Financials (UYG) D-
ETF
54.61%
Regional Bank HOLDRs Trust (RKH) D+
ETF
42.55%
ProFunds Financials UltraSector ProFund (FNPIX) E-
Open-End
40.93%
SPDR KBW Bank ETF (KBE) D+
ETF
35.85%
First Opportunity Fund Inc (FF) D+
Closed-End
34.11%
RevenueShares Financials Sector Fund (RWW) U
ETF
33.43%
Fidelity Select Banking Portfolio (FSRBX) E
Open-End
33.05%
PowerShares Financial Preferred Portfolio (PGF) D
ETF
31.82%
iShares Dow Jones US Financial Services Index Fund (IYG) C-
ETF
30.93%
Financial Select Sector SPDR Fund (XLF) D+
ETF
30.45%
iShares Dow Jones US Regional Banks Index Fund (IAT) D+
ETF
29.92%
PowerShares FTSE RAFI Financials Sector Portfolio (PRFF) D
ETF
28.77%
Diamond Hill Financial Long-Short Fund (BANCX) E
Open-End
28.34%
North Track Dow Jones US Financial 100 Plus Fund (NDUAX) E
Open-End
27.13%
John Hancock Bank and Thrift Opportunity Fund (BTO) C-
Closed-End
27.08%
Wells Fargo Advantage Specialized Financial Services Fund (SIFEX) E
Open-End
26.92%
Vanguard Financials Index Fund (VFAIX) E-
Open-End
26.64%
Rydex Series - Banking Fund (RYKAX) E-
Open-End
26.03%
AIM Financial Services Fund (FSFSX) E-
Open-End
26.01%
John Hancock Regional Bank Fund (FRBAX) E
Open-End
25.81%
Vanguard Financials ETF (VFH) C-
ETF
25.44%
iShares Dow Jones US Financial Sector Index Fund (IYF) C-
ETF
24.70%
Source: Bloomberg & TheStreet.com Rating.

IntercontinentalExchange ( ICE), a New York clearinghouse for credit default swaps, plans to clear its first batch of contracts this weekend. With the $27 trillion market for these swaps clearing trades through exchanges, the risk of worldwide cascade failure due to counterparty risk, which necessitated billions in bailout dollars, can be minimized in the future.

Successful triage of financial institutions opens the door to fixing the regulations that allowed what President Barack Obama last week called "endless cycles of bubble and bust." Looking forward, the first major overhaul of the financial-services sector's regulatory structure in 80 years is working its way through the U.S. House and Senate. Proposals such as a Financial Product Safety Commission, modeled after the Consumer Product Safety Commission, could fill regulatory gaps and standardize constantly changing product terms and conditions. Eventually, the plan is for one systemic risk regulator to manage all the financial oversight agencies.

Hopefully, last week's rally won't turn out to be just another bear-market retracement. However, a gain in the week ending March 13 was the Dow Jones Industrial Average's third repetition of a cycle of four down weeks, then one up week. Caution is still warranted.

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 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.

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