This week’s issue of Fidelity Independent Adviser’s Sector Momentum Tracker examines the recent momentum surge in banking funds. Sector Momentum Tracker’s Sector Momentum Table ranks a variety of Fidelity Mutual Funds using momentum based indicators to pick timely investments for its subscriber base.
In his weekly feature, Don’s Outlook, publisher Don Dion noted that, “investors are currently witnessing what is almost certainly a once-in-a-lifetime restructuring of the global financial sector.” Banking (FSRBX) was the best performer last week on Dion’s momentum ranking table.
Since March, three venerable Wall Street firms—Bear Stearns, Merrill Lynch and Lehman Brothers—have either merged with larger, more stable rivals or gone bankrupt, while Morgan Stanley and Goldman Sachs have received permission from the Federal Reserve to reorganize as commercial banks.
Last week, JPMorgan Chase agreed to acquire most of Washington Mutual’s operations, and this morning Citigroup announced it would acquire Wachovia for $2.2 billion ($1 a share). As part of the Wachovia deal, Citigroup has agreed to assume $42 billion worth of Wachovia’s debt, and the FDIC will assume the rest. “Safe haven investments such as gold and Treasury securities are likely to retain much of their appeal to investors in such an uncertain environment,” Dion said.
FSBRX has benefited from the Securities and Exchange Commission’s temporary ban on the short sale of financial stocks, which will remain in place until October 2. In addition, the top holdings in this fund include many of the banks that Dion believes are “likely to thrive” in the coming months and years: Wells Fargo (14.40 percent of net assets), Bank of America (4.35 percent). In the wake of the implosion of Wall Street, retail branch networks and FDIC-insured deposits appear to be the keys to future profitability.
Dion recently spoke about the sector when he teamed up with Federated Investors’ Phil Orlando for an election themed conference. “No matter who takes office this January, we will see changes in the treatment of the financial sector,” Dion said. “Obama and McCain have different views on regulation,” Dion added, “people should position their portfolios now to take advantage of upcoming changes.”
“After much partisan wrangling, the contours of a financial sector bailout are emerging on Capitol Hill,” Dion noted, “although a final bill is still a long way from passage.” In its current incarnation, the Treasury Secretary would receive $350 billion immediately to buy mortgage-backed securities—so-called “toxic debt”—from investment banks. The goal is to restore confidence in the financial system, whose short-term credit markets have seized up in recent weeks, i.e., banks are hesitant to make even short-duration loans to one another because no one knows how much bad paper the other is holding. A massive infusion of taxpayer dollars could help alleviate much of that institutional fear. Depending on how well the initial $350 billion outlay works, Congress could authorize further expenditures of up to $350 billion more to help lubricate the debt markets.
Sector Momentum Tracker is a member of Fidelity Independent Adviser’s family of financial publications. With more than 70,000 subscribers in the United States and 29 other countries, Fidelity Independent Adviser publishes four monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.
Don Dion, publisher of Fidelity Independent Adviser, is also president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Massachusetts, Dion Money Management manages more assets for clients in 49 states and 11 countries. A licensed attorney in Massachusetts and Maine, Mr. Dion has more than 25 years’ experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.