Marc Pado Comments: Financials’ Love Fest Continues To Lift Equities

January 17, 2012, Barron’s Online

The last continue to be first, as some of 2011’s most hated stocks, the financials in particular, led the market to another week of gains. Equities rose almost 1% last week in decent trading volumes.

Investment banks and brokerage firms—down some 44% last year—were again among the leading groups and are up about 10% so far in 2012. Stocks fell Friday, but still managed to finish above the day’s lows.

The year is young, but it might not be a coincidence that financials turned on a dime Jan. 2. There appear to be some preliminary moves by institutional investors to raise their exposure to beaten-up financials.

The Dow Jones Industrial Average, rose 62, or 0.5% on the week, to close at 12,422.06. Dow component Bank of America (ticker: BAC) is the leader of the pack, up 19% in 2012. The Standard & Poor’s 500 index rose 0.88% to 1289.09, and the Nasdaq Composite gained 1.4% to 2710.67.

While the travails of the European debt crisis hurt Friday—France was downgraded by Standard & Poor’s—the profit-taking was minimal, points out Marc Pado, U.S. market strategist for Cantor Fitzgerald. Last year’s dogs, the economically sensitive groups like financials, autos and materials, are leading in 2012.

"You would have expected that in the first week," he adds, but Pado asserts this week’s second rise means it’s more than a bounce. Institutions are taking a new look at financials and are reducing the underweight of those stocks in their portfolios, he says.

Those same investors, adds Tim Ghriskey, chief investment officer at Solaris Asset Management, are trying to decipher which banks will be allowed by the Federal Reserve to raise dividends and buy back stock after April’s stress test.

While the heavy early betting seems to be on the embattled Bank of America, Ghriskey says JPMorgan Chase(JPM), Wells Fargo(WFC) and U.S. Bancorp(USB) are the odds-on favorites to be allowed to return more cash to shareholders. Friday, JPMorgan Chase reported a 23% drop in fourth-quarter profit on poor investment-bank business, but the bank’s total loan book rose 4%. In 2011, the bank’s profit rose 9% to $19 billion.

Another possible rally support could come from pension funds, which are having to reallocate assets, adds Ghriskey, because yields are so low.