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.
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.