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Why the Financials Can Continue to Lead Us Higher

Nicole Urken, Mad Money Research Director

From: Nicole Urken
Sent: Monday, March 12, 2012 7:27 PM
To: James Cramer
Subject: SECTOR PERFORMANCE--LAST 7 YEARS

Financials was the big laggard group of course of the last 7 years, down over 50 percent. Energy was the best performing group , up over 70 percent. The performance of the other sectors is as follows: Technology up 46 percent, Consumer Staples up 44 percent, Consumer Discretionary up 30 percent, Health Care up 21 percent, Utilities up 20 percent, Industrials up 19 percent, and Materials up 16 percent.

From: James Cramer
Sent: Thursday, March 15, 2012 06:41 AM
To: Nicole Urken
Subject: Bank sector

Can we get S&P weightings for bank sector now, and last five years

Nicole Urken, Mad Money Research Director

From: Nicole Urken
Sent: Thursday, March 15, 2012 8:17 AM
To: James Cramer; Edward Graham
Subject: RE: Bank sector

Just got from S&P: Current weighting of financials is 14.65 percent. This compares to 15.78 percent in March 2011, 16.50 percent in March 2010, 10.81 percent in March 2009, 16.81 percent in March 2008, and 21.63 in March 2007.

For Mad Money’s seventh year anniversary show, we took a look at the best performing stocks of the last seven years along with the last year to try to identify common themes. Ultimately, the “Best of Seven” performers over the long haul of the show since 2005 have demonstrated staying power given growth from niche market opportunities while the “Magnificent Seven” top performers of the past year, largely speculative names, reflect the importance of risk-taking within a portfolio for out-sized gains.

However, in addition, we took a look at the performance of the broader sectors and indices over the course of the show to get a sense of the bigger picture. A reminder of the staggering underperformance of the financials as laid out above—down over 50 percent since Mad Money began—is timely amidst the surge we are currently seeing in the group. (The latest boost to the group, of course, has come JP Morgan front-running the Federal Reserve’s stress test results with a $15bn share repurchase announcement and 10 percent dividend raise—not to mention the largely positive stress tests telling us that 15 of the 19 largest banks in America have enough capital to withstand another severe recession.)

The ability for the banks to now redeploy capital (i.e. return money via dividends and buybacks) will continue to drive the group upward. But, importantly, we have to remember (and it’s easy to forget!) that the group remains under-owned and under-appreciated, still down significantly from its highs and making up less than 15 percent of the S&P weightings versus a high of 22 percent five years ago. While the banks will not again capture the return on equity levels they once achieved—particularly the bulge bracket banks like Goldman Sachs given increased regulation—there remains run-room ahead given severe underperformance and still-depressed valuations.

One core area of upside lies in the regional names—such as U.S. Bancorp—given exposure to later-cycle trends that we are just seeing kick in. What are these? (1) An improving labor market—which prompts more borrowing and spending, (2) an improving housing market—which is key, as banks are essentially ‘home owners’ of sorts given mortgage portfolios, (3) an improving manufacturing picture—boosting commercial & industrial loans, not to mention the improved spending picture for those employed in this arena, and (4) a steepening yield curve—which will boost net income margin—as investors begin to shift away from the bond markets into equity markets.

While the diversified industrials group are often the “go-to” cyclical recovery plays, the financials are ultimately the most-levered to a continued consumer and corporate recovery. And, despite the year-to-date outperformance in the group, there is more room ahead for them to run. Yes, macro worries remain and the recovery is indeed uneven (the bears continuously cite weak pockets in the macro picture) but the truth is that we continue to see incremental strength in the economic backdrop globally (and particularly in the US) along with bullish commentary from individual companies (bottoms-up approach). There remains opportunity within the financials—and particularly in the regional banks. Keep an eye out for more commentary on specific names on Mad Money. And, importantly, the upside in the group is important in leading the overall market.

A happy seventh anniversary to the Mad Money team as year number eight kicks off! Booyah.



"Inside the Madness" appears twice a week at madmoney.cnbc.com

Follow Nicole Urken on Twitter @nicoleurken

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