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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Regional Banks

January 10th 2012 Regional Banks ETF
NYSE Symbol: KRE
Price as of 1/9/12: $25.93

Happy New Year. Good riddance to 2011 and on to 2012. The start of the New Year has brought fresh cash and a rotation of money to new sectors. The three best performing sectors of 2011 Utilities, Consumer Staples, and Healthcare have succumbed to profit-taking. The techs have held in there to start the New Year with Microsoft looking particularly good. Hopefully that stock can break out of its' 10 year range soon. Plenty of investors remain on the sidelines concerned with the European problems and slowing fourth quarter earnings. The worst performing sector of 2011, the financials are off to a good start in 2012. Bank of America is up 10% in just 4 trading days. Unfortunately, B of A was down 60% last year. This week, we'll feature an ETF for the regional banks (KRE).

A number of things may benefit the financials in 2012. First, we have sector rotation. Money managers typically readjust their portfolios to start the New Year selling some of their winners and allocating money to the sectors that haven't worked. Financials have certainly not worked and are by far the cheapest sector in the market. Many of bank stocks trade for not only less than book value, but less than tangible book value and the dividend yields are becoming very attractive. Plus recent data indicates that housing is stabilized, although we've heard that before. Second, with the recent turmoil investors are attracted to businesses with limited foreign sales particularly to Europe. The regional banks once again should benefit from this investment philosophy along with the slowly improving U.S. economic recovery.

All the financials performed poorly in 2011, but not all financials are created equally. The regional banks are the safer play although the big cap banks are extremely cheap as well. Both big cap banks and regional banks should continue to raise their dividends and issue share buybacks in the coming years. JP Morgan has already rallied nearly 10% for the year with a dividend at the end of December. Insurance stocks also took it on the chin in 2011, but have started to perk up. Metlife and Hartford were upgraded by Goldman Sachs this week. Metlife has been aggressively spinning off many of their banking businesses to get out from under the government regulations.

But the safer play for 2012 in the financial sector may be the regional banks. The EFT symbol KRE sports a dividend yield over 2%. Hopefully 2012 will see a revival in not only the banking sector, but the housing market and the economy in general.