The Big Picture for the Week of November 28, 2010

Pragmatic Capitalism reposted a list of ten reasons why US banks are better to buy than European banks which was originated at Credit Suisse. You should click through to read the list. The logic of the list might be completely correct drawing the correct conclusion; US banks may indeed be better to buy than European banks.

That said, they could both stink and be undeserving of your investment dollars. If you have been reading this site for a while you know that this has been my opinion for a long time now; they both stink and that one group might collectively stink less is not much of a hook for me.

The notion of sovereign contagion should be plausible from Asia 12 years ago and what has happened thus far in Europe. Of course there might not be any further dominoes to fall which leaves banks that operate in markets facing declining real estate prices, over indebted consumers, lousy demographics and weak (at best) growth prospects. From where I sit it doesn't look much different for the US banks in terms of where we are right now and what appears to lie ahead fundamentally, even if there are many trading opportunities along the way.

I was able to find three financial sector ETFs that exclude the US and Europe (if there are others please leave a comment as it would be easy to overlook something given how many funds there are). There is the iShares Far East Financial Fund (FEFN) which is 59% Japan. There is the iShares Emerging Markets Financial Fund (EMFN) which is promising but has 28% in Chinese financials which I want no part of for reasons I have said many times before. There is also the EG Shares Emerging Markets Financials Titans ETF (EFN) which is 40% in China. A fourth possibility requires going a little narrower with the Global X Brazil Financial Sector ETF (BRAF). I am not a fan of Brazilian financials and have no exposure but I think they have better prospects than Chinese financials.

For several years already and going into the future, in my opinion alpha can be generated in this sector by simply avoiding domestic and European banks and I also do not want Japanese or Chinese financials.

A perfectly valid way to build financial sector exposure, although I prefer individual stocks here, is to capture it via country funds. I've disclosed many times being partial to banks from Canada, Chile and Australia. The respective country funds have plenty of financial exposure but if, for example, you are going to buy iShares Australia (EWA) you need to know a little bit about BHP Billiton (BHP) which is the largest holding in the fund. A few clients own EWA as do I. There are plenty of of other country funds that are very heavy in financials like iShares Singapore (EWS) and the Global X Nordic 30 (GXF) which are 50% and 28% in financials respectively and there are more still.

I don't think this actually requires any less work however. The Market Vectors Egypt ETF (EGPT) is 46% financials. Egypt has some good things going for it to be sure but would you buy the fund not knowing anything about the Egyptian banking or financial system? Hopefully your answer would be no.

Additionally, in using country funds, heed must be paid to the cumulative exposure to all the sectors. You may not have a problem with being 30% financials (way too much for me) but you should know that, or some other number, is your weighting.

The picture is the Astoria, OR branch of Bank of America, at least it was 16 months ago.