What to Expect From Financials in 2009

Financials are a funny sector. Either they are out in front of the pack in a bull market, or they severely lag the market in a bear as we have seen recently. The question is will financials keep dragging on the bottom or will they rally to lead the market out of its slump? I am going to say right now that financials will not be a feel good story until maybe the end of the year. We will have to wait until 2010 to see a true rally and none of these short squeezes or seemingly feel good stories. So if they are going to drag what should we invest in?

I think it is important to get out the fact that credit still hasn't regained its popularity yet so income from interest is not going to be significant on earnings statements in the coming quarters. Also we have to remember that the companies doing all the acquiring (BAC, JPM, WFC) will still be absorbing losses from the respective acquired companies. This will dampen earnings for another quarter or two until the businesses are fully integrated.

There are no specific companies that really just stand out. However, with the government helping out most major financial companies, it would be wise to sit back and watch how the companies respond to the assistance. See what they do with the money and if its in the best interest of customers, shareholders, or management. Dividends are also another area to watch. Have these companies had to cut their dividends(most have) or will they keep raising it? At no time in the next 6 months should you just jump into financials. Start to look into building a small position into the third quarter.

As for specific companies to invest in, a few could stand out once this bailout business does what its supposed to. Morgan Stanley(MS) and Goldman Sachs(GS) both stand out as they are the last of the brokerage firms. What is more important is that both have become bank holding companies. JP Morgan(JPM), Bank of America(BAC), and Wells Fargo(WFC) each have to swallow their respective acquirees balance sheets. WFC stands out here as they didn't quite need the government's help to acquire Wachovia. BAC will become the largest bank if everything goes as planned. BAC and JPM will both expand into the mortage area with Countrywide and Washington Mutual being acquired. Credit still remains a problem as nobody wants to lend except for the government. Once credit thaws out look for Mastercard(MA) and Visa(V) to stand out.

There are good companies that were not mentioned here. As always do your own homework and research before you just except anyone's thoughts and ideas. This is the sector you will have to be patient with the most. Resist the urge to buy into any rally and wait to see how banks respond to what has happened over the past several months.