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Pulling the Trigger on Financials is Suicide (XLF)

July 19, 2012 4:33 PM EDT
Going into earning season hopes were pretty dim, but after solid earning performances by JPMorgan (NYSE: JPM) and Goldman Sachs (NYSE: GS), negative sentiment regarding banks and financial sector stocks slowly began to turn. Then Morgan Stanley (NYSE: MS) reported earnings.

Morgan Stanley's earning showed margin improvement in wealth management, but this did little to offset a 26 percent quarterly drop in revenue. The main source of pain for the bank was weak trading results.

As a result of the weakness, Morgan Stanley will be tightening its belt by shedding jobs. Morgan Stanley, like other large banks, is struggling to manage a tough banking environment. Bank of America (NYSE: BAC), Credit Suisse (NYSE: CS), and Citigroup (NYSE: C) all have plans to reduce their workforce, and even Goldman Sachs (NYSE: GS) is hunting for ways to cut costs through lower payroll expenses.

After outperforming for most of the year, Financial Select Sector SPDR ETF (NYSE: XLF) rolled over in May, dropping 13 percent. Since then it has recovered and is trading flat on a 30-day time frame. Going forward it is clear stocks in the sector are facing an up hill battle.

Some feel extreme pessimism may already be prices in. If so, banks could be set to outperform in the back half of the year. However investing in this sector in this environment is not for the faint of heart, and on the whole is probably best avoided for the time being. Investors who want exposure to financials are probably better off playing individual names rather than ETFs like Financial Select Sector SPDR (NYSE: XLF)

Names like US Bancorp (NYSE: USB) are likely to be better positioned in this environment. Recently, US Bancorp recently received positive coverage from an analyst at UBS. UBS has a Buy rating on US Bancorp with a $38 price target.


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Credit Suisse, UBS, JPMorgan, Citi, Morgan Stanley, Earnings