Weekly Chartology: A Focus On Fund Flows Into Financial Stocks
As Goldman's David Kostin points out, this week's key capital flow observation had little to do with QE2 (which at $600 billion over 8 months, was actually less than the anticipated $500 billion over 6 months), which had a far greater impact on commodity prices as Zero Hedge had expected (and ES was down in gold for the week, and continues to be very much down for the year), and all to do with the Fed's "non-announcement" that it would allow financial firms to recommence dividends. This resulted in a spike in financial shares, which jumped the most in the prior week. In light of Friday afternoon's repeat announcement that a Federal agency (this time the Chicago FHLB) was following in the footsteps of the FRBNY, and claiming Rep and Warranty fraud over $375 billion in RMBS, banks won't be depleting their reserve funds any time soon. But all is fair in war and industry rotation, even if it makes no sense. More to the point, even Goldman advises clients this as nothing but a headfake: "We currently recommend a neutral weighting in Financials although we recognize the positive impact a round of dividend hikes will have on share prices. Our concern relates to the lack of loan demand, slim net interest margins as the yield curve flattens, restrictions on business activity from “Volcker Rule,” Basel 3 capital requirements, and the impact of Fin Reg." But since when did fundamentals matter? These days it is all a question of fund flows, typically those originating from the Federal Reserve.
Full weekly commentary and complete chartology from Goldman: