Goldman Sachs (GS) kicked off second-quarter earnings season for the big banks on July 14, reporting profits of $4.93 per share, vs. the average analyst estimate of $3.48. At 150, the company's share price has nearly tripled since hitting a low last November. Likewise, shares of financial companies in the Standard & Poor's 500-stock index are up 95% since bottoming in March, vs. a 34% gain for the overall index. But even though shares of financials remain 66% below 2007's peak—Goldman's stock traded for almost 250 at one point—it's not likely the outlandish gains of late will continue, say analysts at CreditSights. A recent report from the independent research firm explained that the banking industry is moving toward a more conservative operating model, with lower leverage and higher reserves: "Total returns going forward will be more in the 8% to 12% range compared to 12% to 20% in past years." And there will likely be more bumps in the road amid continued weakness in commercial lending and if the credit quality of loan portfolios continues to worsen.
A Well-Balanced ETF
For those who wish their portfolios had been better insulated from the technology stock crash in 2000 or the financial stock meltdown last fall, there is the new Equal Sector Weight ETF (EQL). Launched on July 7 by ALPS Advisors, a Denver-based financial services firm, this exchange-traded fund owns equal holdings of the nine Select Sector SPDRs, ETFs that track the performance of sectors in the Standard & Poor's 500-stock index.
According to a back-test of the methodology, the Equal Sector Weight ETF would have lost 35% in 2008, compared with the S&P 500's 37% decline. Since 1999 the ETF would have outperformed the overall index by about three percentage points a year, with lower volatility. Equal weighting doesn't necessarily mean investors totally lose out during boom times. The Equal Sector ETF would have matched or beaten the S&P 500 every year since 2000.
Homing in on Brazil
Brazil's central bank has cut interest rates by 4.5 percentage points so far this year, to 9.25%, and analysts expect rates to drop further when policymakers meet July 21-22. Mortgage rates have dropped in tandem, making first-time homes affordable to more than 7 million families with an average household income equivalent to $1,275 per month, says Samuel A. Lieber, manager of the $500 million Alpine International Real Estate Fund (EGLRX). Those low rates combined with better borrowing terms—30-year mortgages are gaining traction—make Brazil's real estate sector "the best place in the world to put your money for the next five to 10 years," Lieber argues. Alpine International Real Estate has a 20% stake in locally listed Brazilian real estate companies. Holdings in Brazil include MRV Engenharia and PDG Realty, which specialize in affordable housing, and mall operators BR Malls and Multiplan.