Monday, March 28, 2011

The Financial Sector Comes Roaring Back

It's hard to believe that it was only three years ago that the entire financial system stood on the brink of total disaster.

Starting with the forced merger of Bear Stearns with JP Morgan, 2008 was indeed an annus horribilis for the entire financial sector.

But that was then, this is now.

With huge dollops of financial assistance from the federal government, banks, insurance companies and brokers have come roaring back. A recent post from the Wall Street Journal notes:

Friday’s revisions to U.S. gross domestic product contained news on fourth-quarter profits. Top-line, or pretax, operating profits economywide hit a record high at the end of 2010. All of the gain was in the financial sector.

Since {2008}, the sector has come roaring back. The GDP report shows finance profits jumped to $426.5 billion. While profits haven’t returned to their high levels of 2006, the gain in finance profits last quarter more than offset a drop in profits posted by nonfinancial domestic industries.

After rising like the Phoenix, the financial industry now accounts for about 30% of all operating profits. That’s an amazing share given that the sector accounts for less than 10% of the value added in the economy.

However, financials have underperformed the S&P recently. Merrill Lynch strategist Mary Ann Bartels believes that the weakness may be a sign that the yield curve (i.e. the difference in yields between the 2-year Treasury and 10-year Treasury) may be flattening, which historically has been a significant headwind for financial companies.

For me, I have been struggling with this group for some time. My biggest concern is housing, the huge overhang of mortgage debt that remains from the excesses of the past decade.

But for now, the financial group is partying like 2006.