Financial Stocks - The Catch To Investing In Financial Stocks

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Then just this week, Bank of America (BAC) put up a great earnings number.

The number of investors licking their chops over the financial sector started multiplying.  Don’t believe me?  Just look at a chart of the Financial Select Sector SPDR ETF (XLF).  In the spirit of full disclosure, I own this ETF in my own account.



As you can see, the XLF ETF bounced off the lows and are now up more than 50% in just a few weeks!  A move like that gets everyone excited, and investors start looking for ways to participate.

At the risk of sounding like a kill-joy, let me ask a simple question.  Is it too late to get into the financial industry?

I’ve got to be honest, this is a tough question.  Banks are still risky propositions.  They have exposure to credit card debt (default rates have been moving higher) and they also have major commercial mortgage exposure (another shoe that has yet to drop).

However, I also think we’re through a lot of the bad news.

So, here’s the catch to investing in the financial industry…

You can’t just toss your investment money into any old stock.  Nope, the key is to determine what companies are the strongest… because they’ll lead the industry higher.

We know the strongest financial companies will survive and take away market share from the weak.  So, who’s the strongest?  Unless you’re working for the government and running the financial stress test, it’ll be tough to determine who’s a survivor and who’s worm chow.

You know me.  I like to keep things easy.  So here’s the easiest way I’ve found to determine who’s a winner and who’s not.  TARP funds.

Back when TARP was created, Treasury Secretary Paulson called all the major banks to Washington.  In this secret meeting, he forced the banks to take money… even if they didn’t want it.  (The Wall Street Journal had a great article on this little meeting by the way.)

Some banks were happy to get the money.  They clearly needed the capital.  Other banks cringed.  Why did he force everyone to take the money?  Because Paulson wanted to hide which banks were in trouble and which weren’t.  Can you imagine the turmoil if he didn’t?  Investors and depositors would have fled from the weak banks… we would have seen depression style bank runs.

Now, everyone who took the money is being reviewed with a microscope. The government keeps adding regulations and dictating how the banks should run their business.  It’s these changes that are making the strong banks uncomfortable… and they’re starting to speak out.

I believe the banks who are now publicly calling to return the TARP funds are the strongest around.

If they can pay back the money without hurting their capital structure, it shows me their business was strong from the beginning.  A handful of small banks have repaid the TARP funds.  Now three major banks are pounding their fist on the table.  They want to pay back the money to the government.

Those three companies are Goldman Sachs, JP Morgan, and Northern Trust (NTRS).

It doesn’t take a brain surgeon to see these companies are the survivors… at least the first to be pulled from the plane crash that is the financial industry.  Consider adding one, two, or all three to your investment portfolio.
 

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