Tuesday, May 5, 2009

How Long Can the Bank Rally Last?

As the stress test results continue to be leaked slowly, the news out today increases the total number of banks that reportedly need capital to 10 out of the 19. Since bank stocks absolutely ripped on the incredibly bullish news yesterday that 4 banks may need capital, the S&P is bound to hit 1450 today. The most reasonable explanation I could find for the return of enthusiasm for owning bank stocks is the belief that banks can easily raise the capital they need and everyone can go about their merry way making money again by lending at some interest rate, any rate will do because it is bound to be higher than zero, their financing cost. What I’ve had trouble reconciling though, is that a number of fairly intelligent people believe that roughly $4 trillion in toxic assets still sit on banks balance sheets. Furthermore, even though everyone keeps emphasizing the “green shoots” in the economic data, I’m having trouble figuring out what on earth they are talking about. Both pending home sales and construction were up slightly yesterday from abysmal levels and the headlines beamed “great housing news boosts stocks!”

But maybe I’m just too pessimistic. Spreads in credit markets have tightened considerably since early March. Investor interest is picking up in the Fed’s TALF program, which had $10 billion in demand this month, the highest since the program was launched. Certainly these are positive signs. But then I remember what a looming disaster the commercial real estate market is facing, and how that is bound to whack bank stocks further. Then I wonder what the employment report will look like Friday, and I think that maybe the market has just gotten ahead of itself. After all, wasn’t it a year ago when the heads of certain banks that have since received significant government infusions or are now unemployed were claiming with confidence that the worst was over? How long can the bank stock rally last? Longer than any short worth his salt can stay solvent.

4 comments:

g said...

k10,

Any thoughts on a government sponsored rally? Outside of the fact that most of the 19 banks are already nationalized except in name, do you think that there is any truth pointing to a conspiracy theory of the government buying up stock of, say the ETFs?

K10 said...

I never used to believe in conspiracies related to the market. I don't believe in efficient markets either. Sometimes things just get out of whack because investors herdlike mentality wind up chasing the prevailing wisdom. Things like "volatility has decreased forever because we're better at managing risk" or "subprime is contained" or "Bear Stears failure was the one-off event that marked the bottom" become the prevailing wisdom, even though they are later proven to be preposterous. I think the current rally is being driven by the belief that maybe this was just a big liquidity problem, not a solvency problem, the government has done enough, and everything is going to be peachy again so the market is cheap. I totally disagree with this notion, but sometimes it's just best to get out of the way of a moving train. Then again, this could easily be a Goldman orchestrated short squeeze...

Anonymous said...

I really find it hard to believe that people would invest their money in any of the existing big banks, knowing that the amount of toxic assets they hold will be weighing them down for quite a while. I guess they count on the gov't to continue to pull these businesses out of the hole, keeping their investment relatively safe. Who knows. If I had the money, I would invest in one of the new, green banks that are cropping up these days. They have no pre-existing trouble, no toxic assets and they can take advantage of the sustainability incentives. I read about one of the, e3bank, the other day. They seem to be taking full advantage of the mess their competition has caused.

g said...

I spose what I meant with "goverment buying up stock", I really should have put it as you did (Goldman orchestrated short squeeze...) that its a Goldman sponsored rally. We all know Goldman runs Congress.