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Tickers in this Article: nyx, cme
The landscape of financial stocks is littered with falling commercial banks, mortgage lenders and investment shops. It's the scariest state of affairs I've seen since the tech-led market collapse which started in the spring of 2000. But surprisingly, some financial niches are in the middle of a major bull market in demand for their services, foremost being the public securities exchanges.

Now's Not the Time to Abandon Asset Allocation
It still makes sense to have a well-rounded portfolio, and that means getting some exposure to financials, which make up more than 20% of the market cap of all U.S. companies. But where do you turn when most banks have direct mortgage exposure (through their lending, servicing, or balances), investment banks are holding mortgage-backed debt & LBO debt by the hundreds of billions, and absolutely nobody knows for sure just how severe the housing slump will be?

Confusion Creates Volatility
Volatility has been on a steady rise - CBOE's VIX market volatility index is up to the high 20s after reading below 20 for nearly all of 2007. This is leading to markedly higher trading volumes on the major stock, bond and derivatives exchanges. While stocks see-saw around in an uncertain environment for corporate profits, many of the world's major commodities are trading at all-time highs. The markets for crude oil and metals especially are benefiting from strong global demand for energy and infrastructure build-ups.

The trends in places like the BRIC nations could make today's commodity prices seem like chump change ten years from now. (For related reading, check out Commodities: The Portfolio Hedge.)

Profiting From Volatility
NYMEX Holdings (NYSE:NMX) is the parent of the New York Mercantile Exchange, the world's largest exchange for energy options and futures. It also provides services for buying, selling and settling (including physical delivery) a wide range of metals including gold, silver, platinum, copper and aluminum. Trading is done both by traditional open outcry and via electronic trading, but it's the latter that really grabs my attention. For the month of December, company-wide trading volumes were up 16% compared to the same month in 2006. Within that figure, however, was 75% growth across the NYMEX's two electronic trading platforms. Today more than 50% of the total contracts that change hands per month do so electronically, and this ratio should get higher in the coming quarters.

Suitable Place to Park
NYMEX's valuation isn't cheap (at just over 42-times trailing earnings), but it's justified in the face of net income growth of 54% in the third quarter of 2007. Fourth-quarter earnings come out on February 2, and estimates call for EPS of 66 cents, which would represent growth of 43% year-over-year. In addition, the company is expected to continue this growth over the next several years, which, all told, gives the stock a PEG right at 1. As I look through financial stocks, I may see other PEGs that are lower but I don't feel very confident about the quality of their estimates. There are just too many falling knives out there for me to go reaching right now, even at single-digit current P/E ratios. (For more on the PEG and P/E ratios, see How The PEG Ratio Can Help Investors and Move Over P/E, Make Way For The PEG.)

Acquisition Target?
There has been much speculation on whether one of NYMEX's rivals would snatch up the company, with specific emphasis on the CME Group (NYSE:CME), owners of the Chicago Mercantile Exchange. I think the current environment might have stalled this idea out, but the situation is still worth following closely. NYMEX has a leading position in several commodities that the other guys would love to have, and management hasn't been shy about stating its openness to the idea. This should keep some ancillary market players on board NYMEX shares as the prospects get vetted out in the marketplace.

Parting Thoughts
I would normally shy away from the high valuation, but earnings growth at NYMEX has been torrid and the stock is down over 25% in 2008 alone. I simply feel this is unjustified given the strong global trends toward increased metals consumption and energy usage. I am looking for the stock to keep pace with earnings growth, which makes this a compelling financial play in an otherwise unsavory sector.

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