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Roger Nusbaum, Chief Investment Officer, YOUR SOURCE FINANCIAL (RIA)

Tuesday, April 26 2011 | 02:41 PM
Roger Nusbaum
Chief Investment Officer, YOUR SOURCE FINANCIAL (RIA)

Yesterday on CNBC I heard a tease for segment (I missed the actual segment) about the fact the domestic financial stocks are not doing well relative to technology. While I am not sure that tech is the best comparison there is a point here about financial stocks that I have been making for a long time that I believe will remain relevant for several more years.

First, some numbers with results of a few different sectors over several time periods;

Financials XLF +0.88%
Technology XLK +4.75%
Energy XLE +14.97%
Staples XLP +5.12%
Discretionary XLY +6.51% (XLY is a client holding)
S&P 500 6.16%

One Year;
XLF -4.11
XLK +9.58%
XLE +26.37
XLP +9.92%
XLY +11.72%
S&P 500 +9.68%

Four Years;
XLF -56.64%
XLK +8.91%
XLE +24.35%
XLP +11.63
XLY +0.71%
S&P 500 -10.05%

The numbers say a lot about the mess that has been made in the domestic financial sector. The events in the market from 2007-2009 were obviously about the financial sector. There were many types of excesses that resulted in a monumental meltdown in the sector--monumental for the number of large companies that failed and the large number of stocks that dropped 90% and are nowhere close to where they traded before the implosion.

The nature of this sort of event is such that it will be years before domestic financials, collectively, are attractive on a fundamental basis and so I think it is likely that they will continue to struggle as stocks. This has been the case with technology from that market event. For ten years the S&P 500 is up 7.41% while XLK is down 12.02% (MSFT is down 25% for ten years and INTC is down 32% for ten years). It looks to me like outperformance of tech over the SPX may have started at the 2009 bottom which is a long time for the ground zero sector to lag and while an exact duplicate in financials is unlikely, if you then consider the fundamental outlook, I think we are a long way from health.

The above brings in two different things to consider; one being how markets tend to work which is more of a top down factor and the other being what I believe is a lack of fundamental health which is of course a bottom up factor. It seems to me that no matter any of this, that the financial sector has been a favorite of many professional market participants. Given my perceptions of the sector I think it makes sense to underweight the risk in whatever financial sector exposure you have (I believe in having exposure to all sectors as zero weight is a big bet). For us this means mostly owning foreign banks as I have discussed many times before.

Think of it this way, in speculating on parts of the financial sector where the fundamentals are not yet healthy, how much do you hope to make? Let's say you think you can double your money. I would say it makes more sense to go to a sector that is healthy on all fronts to pick a stock where you think you could double your money. I realize other people view it differently and clearly there were some great trades off the bottom in the financial sector but speculating on something with weak fundamentals is not a risk I am willing to take.

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