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Renewed Enthusiasm For A Financial ETF

Renewed Enthusiasm For A Financial ETF Related FAS How The Volatility Of Earnings Season Can Affect Leveraged ETFs Banking On Bank Earnings With Leveraged ETFs Related XLF A Look At The Legacy Of Fed's Janet Yellen During What May Be Her Final Jackson Hole Meeting Investors Are Losing Patience With This Regional Bank ETF Dow Chemical Co Buys SPDR S&P 5, Sells SPDR Select Sector Fund – Technology, SPDR … (GuruFocus)

The Financial Select Sector SPDR (NYSE: XLF), the largest exchange-traded fund dedicated to the financial services sector, rose more than 1 percent Aug. 14, posting one of its best intraday performances in several weeks.

At one point that Monday, all 69 of XLF's holdings traded higher, putting the ETF on course for its best one-day showing in roughly two months. XLF follows the Financial Select Sector Index. The ETF has been lagging broader benchmarks for much of this year. XLF is up less than 6 percent year, putting it well behind the S&P 500. 

Despite the year-to-date struggles of the financial services sector, the second-largest sector weight in the S&P 500, some data points suggest traders are still attracted to the sector and its corresponding ETFs. That includes the Direxion Daily Financial Bull 3X Shares (NYSE: FAS), one of the most popular leveraged sector ETFs.

What FAS Does

FAS aims to deliver triple the daily returns of the Russell 1000 Financial Services Index, which is not the same index XLF follows. The index FAS tracks is the financial sector offshoot of the widely followed Russell 1000 Index.

The index FAS follows allocates over 30 percent of its weight to bank stocks and nearly a third of its combined weight to real estate investment trusts and insurance stocks. Capital markets firms account for almost 14 percent of the FAS roster. The top 10 holdings in the Russell 1000 Financial Services Index combine for about 37 percent of the benchmark's weight. 

Well-known stocks in that group include JPMorgan Chase & Co. (NYSE: JPM), Wells Fargo & Co (NYSE: WFC) and Bank of America Corp. (NYSE: BAC).

What Traders Think Of FAS

Much of the disappointment surrounding traditional financial services ETFs this year stems from the sector's reputation from supposedly benefiting from higher interest rates. The Federal Reserves has boosted rates twice this year and it is widely believed a third rate hike will occur before year-end, but the sector is still a laggard.

Data suggest aggressive traders are comfortable betting financials will soon shed their laggard ways. Over the past month, FAS has been one of the most popular destinations in Direxion's stable of bullish leveraged ETFs.

During that period, FAS averaged daily inflows of $1.16 million, according to issuer data. That is good for the second-best pace of asset gathering among Direxion's leveraged bullish ETFs during that period.

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Todd Shriber owns shares of XLF.

Should the Big Banks Really Face Another Credit Downgrade?

The big banks have gone to considerable lengths to mend the weaknesses that they were in before, during and after the recession. The public perception of the big banks is not very highly regarded. Now the banks are apparently at risk of yet another credit rating downgrade. Late on Thursday came word out of Moody’s Investors Service that the credit ratings agency has placed the senior and subordinated debt ratings of the six largest U.S. bank holding companies on review “as it considers reducing its government (or systemic) support assumptions to reflect the impact of U.S. bank resolution policies.”

Moody’s signaled that the four on review for downgrade are Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS), both of which are bank holding companies with no retail banking operations, as well as J.P. Morgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC).

Where the rating changes become a wild card are in Bank of America Corp. (NYSE: BAC) and Citigroup Inc. (NYSE: C). These two were placed on “review direction uncertain” as Moody’s “considers the potentially offsetting influence of improvements in the standalone credit strength of their main operating subsidiaries, the ratings on which were simultaneously placed on review for upgrade.”

Two additional banks with ratings previously placed on review for a credit rating downgrade also were included in the review: Bank of New York Mellon Corp. (NYSE: BK) and State Street Corp. (NYSE: STT).

Moody’s said:

The ratings on the bank-level subordinated debt of JP Morgan Chase Bank N.A. and Wells Fargo Bank N.A. were placed on review for downgrade, while those at Bank of America N.A. are on review direction uncertain. The bank-level subordinated debt ratings of The Bank of New York Mellon and State Street Bank and Trust, which were previously placed on review for downgrade, are also included in the review. There is no rated bank-level subordinated debt outstanding at Citibank N.A., Goldman Sachs Bank USA or Morgan Stanley Bank N.A. … Moody’s actions follow its March 2013 announcement that it would reassess its support assumptions for bank holding companies in the US and that it would consider whether to revise these assumptions by the end of the year.

The ratings placed on review for a downgrade were as follows:

Goldman Sachs Group Inc. (A3 senior, Baa1 subordinated and Baa3 (hyb) trust preferred vehicles) J.P. Morgan Chase & Co. (A2 senior, A3 subordinated, Baa2 (hyb) trust preferred vehicles and Prime-1 short-term rating); J.P. Morgan Chase Bank N.A. (A1 subordinated) Morgan Stanley (Baa1 senior, Baa2 subordinated, Ba1 (hyb) trust preferred vehicles and Prime-2 short-term rating) Wells Fargo & Company Inc. (A2 senior, A3 subordinated, Baa1 (hyb) trust preferred vehicles and Prime-1 short-term rating); Wells Fargo Bank, N.A. (A1 subordinated and A3 (hyb) trust preferred vehicles) Bank of America Corp. (Prime-2 short-term rating) Citigroup, Inc. (Prime-2 short-term rating)

The following ratings continue to be on review for downgrade:

The Bank of New York Mellon Corp. (Aa3 senior, A1 subordinated, A2 (hyb) trust preferred vehicles and Baa1 (hyb) noncumulative preferred); The Bank of New York Mellon (B bank financial strength rating (BFSR)/aa3 baseline credit assessment (BCA), Aa1 deposits and senior and (P)Aa2 subordinated) State Street Corp. (A3 (hyb) trust preferred vehicles and Baa1 (hyb) noncumulative preferred); State Street Bank and Trust Co. (B BFSR/aa3 BCA, Aa2 deposits and senior and Aa3 subordinated)

The following ratings were placed on review for upgrade:

Bank of America, N.A. (D+ BFSR/baa3 BCA, A3/Prime-2 deposits and senior); Bank of America Corp. (B1 (hyb) noncumulative preferred) Citibank, N.A. (D+ BFSR/baa3 BCA, A3/Prime-2 deposits and senior); Citigroup Inc. (B1 (hyb) noncumulative preferred)

The following ratings were placed on review direction uncertain:

Bank of America Corp. (Baa2 senior, Baa3 subordinated and Ba2 (hyb) trust preferred vehicles); Bank of America, N.A. (Baa1 subordinated) Citigroup Inc. (Baa2 senior, Baa3 subordinated and Ba2 (hyb) trust preferred vehicles) State Street Corp. (A1 senior, A2 subordinated)

3 Reasons It Might Be a Good Idea to Ignore the Dow Today

This week is a big one for investors who have been looking for some economic data points to direct their investing. But with so much news coming later in the week, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) may not be a reliable guide today as traders wait for more substantial news throughout the remainder of the week. As of 11:45 a.m. EDT, the index is down slightly with a 71-point loss. With more substantial data points yet to come, there are plenty of reasons to just let today’s Dow moves go by the wayside.

Reason 1: Pending home sales
This morning’s report of signed contracts for existing homes during the month of June showed a 0.4% decline. Though analysts had anticipated a 1% drop, the actual results still mark a fall from May’s six-year high and could signal the impact of rising interest rates on sales. One of the more likely culprits, however, is the continued lack of inventory for buyers to choose from. As last week’s existing homes sales report noted, the current inventory of existing homes stands at a  5.2-month supply — well below the level that economists view as a good balance between supply and demand.

Both of the Dow bank component stocks are down this morning, with Bank of America (NYSE: BAC  ) and JPMorgan (NYSE: JPM  ) down more than 1% so far in trading. Though the losses may not be tied directly to this morning’s sales report, housing data has been extremely important for bank investors lately. JPMorgan is the second-largest mortgage originator in the country, and B of A has been fervently trying to gain more ground in the market, so a decline in potential sales (read: loans) is a problem for the banks, which rely on interest revenue heavily.

Reason 2: More from Bernanke
Tomorrow, the Federal Open Market Committee will begin its two-day meeting to discuss the current monetary policy and any changes that they will make. Since the markets pay very close attention to these meetings and Ben Bernanke’s announcement on Wednesday afternoon, there’s sure to be a lot of movement in the coming days. The current speculation features a cutback in the Fed’s bond purchasing by $20 billion starting in September — though investors will have to wait till Wednesday to see if there’s any merit to that plan.

As the Fed’s stimulus policy changes, there will be an impact on firms with large investments, particularly in bonds. For insurers, this could pose a problem going forward since investment income is an essential part of their business operations. During its first-quarter earnings call, Allstate (NYSE: ALL  ) disclosed that it had altered its investing plan in order to acclimate to the current low-interest-rate environment, though it would be a sacrifice of higher returns later on. This type of change was not widely used, as insurers would have to make a series of adjustments should interest rates rise at a later time. Either way, investors should be aware of such adjustments as the environment transitions.

Reason 3: Employment data
Friday is the big day for labor market data, with the release of the Labor Department’s Employment Situation report. Since labor market conditions are a huge part of the Fed’s calculations for when to pull back on stimulus policies, Mr. Market has been keen to move dramatically when such reports are released. 

Companies that are dependent on consumer spending also pay close attention to labor statistics, since more employed people could result in higher spending. Dow component American Express (NYSE: AXP  ) has been highly successful in large part because it caters to spenders in the high-income demographics. But as people within all segments of the population begin spending at higher rates, the credit card company and its peers will benefit from a broader revenue stream.

Today’s not the day
If there was ever a day to take a break from watching the Dow, it’s today. With so much information to come later in the week, any big decisions today may be wasted once investors start reacting to the news items listed above. And as a long-term investor, you know that any single day isn’t worth sweating over, so you might want to consider taking the day off!

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