What To Do?

Today I read a very compelling article laying out why financials will do poorly. The point of view was intelligent and well thought out.

I also saw an interview on CNBC Europe's Closing Bell where a very compelling bullish case was made for financials. Again, intelligent and well thought out. Both were very plausible. So what is the answer?

I don't know the answer but I can give my take and how I expose my clients to the sector.

Financials currently make up 20% of the S+P 500. 20% is high but the financials have had that weight for a while. A 30% weight is a real danger point, nonetheless I have been underweight financials for a while because of its weight in the index. In 2004 financials have outperformed the SPX by about 2%. I got that call wrong but luckily all of the financials I own were up enough to make up for my being wrong. The weighted average return of the financials I own for clients is up 19.85% YTD (not including a quick trade on CME at the beginning of the year). I always say stock picking is the least important part of the process, but not unimportant and this is a good example of that.

My exposure is and has been one American bank and the rest are foreign banks. They all have very high yields. The flatter yield curve and the Fed raising rates make domestic banks less attractive. I have avoided insurance and brokerage stocks because of the Spitzer risk. One name I owned, and sold way too early is Chicago Mercantile(CME). I did very well on it but sold it more than $100 too early. I am considering adding an emerging market bank soon, but I am still learning how it trades.

One thing I would not do with the sector is buy an ETF. The dividend yields of the banks I own are between 4% and 5%. You won't get that from a sector ETF and obviously that adds nicely to the price appreciation my holdings have given.

This posting gives insight into my sector analysis and big picture info about my stock picking, which the whole point of my blog.