Buffett Lifts Hopes Financial ETFs Have Hit Turning Point
August 25th 2011 at 2:03pm by Tom Lydon
An early rally in financial exchange traded funds waned Thursday along with optimism over a deal in which billionaire investor Warren Buffett placed a $5 billion bet on Bank of America (NYSE: BAC).
The obvious question is whether Buffett’s coveted “seal of approval” on Bank of America will be enough to turn around the fortunes of beaten-down financial ETFs. [Financial ETFs Pare Gains After Buffett’s B. of A. Move]
Buffett, chief executive of Berkshire Hathaway, often negotiates tough deals with companies that need large, fast capital infusions. The Bank of America deal announced Thursday initially boosted sentiment, but large banks are still facing a troubled economy, tougher regulations and potential hits from mortgage-related lawsuits.
“Berkshire’s investment in Bank of America reduced concerns over BAC’s liquidity/funding/confidence and capital to a lesser extent. These actions should also reduce some of the overhang for the group overall — as bank stocks have likely suffered from concerns surrounding a bank as big and as important as BAC,” wrote Deutsche Bank analysts in a note Thursday. “However, these actions don’t necessarily address the longer-term capital uncertainty at BAC, and underlying [earnings] power may prove to be much less than many expect.”
Banking shares have been pummeled in August, with B. of A. down more than 40% over the last four weeks, reports Brian O’Connell for Time. However, financial stocks began gaining some traction after noted analyst Meredith Whitney’s comments on Bank of America earlier this week.
On Wednesday, Meredith Whitney told Bloomberg that Bank of America was doing better than what the markets believed, noting that CEO Brian Moynihan is the “right guy for the job.”
“Banks have continued to make gradual but steady progress in recovering from the financial market turmoil and severe recession that unfolded from 2007 through 2009,” remarked FDIC acting chairman Martin Gruenberg, in the report.
Although banks are better capitalized then they were heading into the 2008 credit meltdown, the technical picture for financial ETFs isn’t encouraging.
“Thursday’s announcement that Warren Buffett will invest $5 billion in Bank of America sent the Financial Select Sector SPDR Fund (NYSEArca: XLF) sharply higher on the open,” StockCharts reported. “XLF opened above $13 [a share] and surged above $13.20 in the morning. These gains quickly evaporated as sellers returned. This failure reinforces resistance from the mid August high. Follow through above this level is needed before taking any surge too seriously.”
The financial ETF also remains below its longer-term support level from the past two years. The fund was up 0.4% in afternoon trading Thursday.
Financial Select Sector SPDR Fund
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.