Re-valuing banks
Stocks are navigating through choppy trade midday on news of an improvement in U.S. consumers’ moods, financials cutting earlier losses, and an upgrade of Merck (NYSE:MRK), which boosted the healthcare sector.
At 1:36 pm ET, the Russell 2000 (NYSE:IWM) is up 2.11, or 0.54%, to 392.23. The Dow is up 0.25% to 7,188.30 and the S&P 500 is up 0.15% to 751.88.
The Reuters/University of Michigan Surveys of Consumers reported today that its preliminary index reading of confidence for March increased to 56.6 from 56.3 in February. That beat economists' expectations for a reading of 55.
The Rally
Stocks made another impressive move higher on Thursday. I think we’re all enjoying seeing a little upside for stock prices. There is a light at the end of the tunnel. But I don’t want us to lose sight of the near certainty that at least one of the lights we’ll see in the darkness will be the proverbial oncoming train.
Market bottoms can be difficult events to get a handle on. Bullish and bearish sentiment is in equilibrium. As individual investors, we might feel that things aren’t getting any worse, but they aren’t getting better, either. Sell-offs appear to clearly be buying opportunities (like when the Dow dropped to 6,440), but any upside is immediately suspect because there’s no real improvement to the fundamental picture.
It’s important to remember that the markets are constantly in flux. Even when things look calm, tension is building below the surface that will propel stocks in one direction or another. Consider the underlying events during this week’s rally …
Re-valuing Banks
We know the bearish story for stocks pretty well by now. But when Citigroup (NYSE:C) came out and said things were going well for it, a number of assumptions changed. The most basic: Citigroup may not be headed for bankruptcy.
Honestly, I thought Citigroup was going to declare bankruptcy. Or at the very least, have a fire sale of any assets that could fetch a bid. So Citigroup forced investors to re-value the bank. And if Citigroup is worth more, then others, such as Bank of America (NYSE:BAC), must be worth more, too.
Don’t think for a minute that bank CEOs aren’t aware of how the news cycle affects their stock price. If rumors can start a bank run, they can certainly inflate a stock price.
BAC’s Ken Lewis has been praising the TARP program over the last few days. Banking is saved and he’s eager to give all the money back ASAP. Many other banks are falling in line, saying they don’t need more money and will give back what they have. Even GM (NYSE:GM) came out and said they don’t think they need more money.
*****Of course, as I expressed in Wednesday’s Small-Cap Daily, I am skeptical that we are getting the whole story from the banks. But even so, I can accept that the lending environment has improved and that banks now have adequate capitalization to take on a bit more lending risk.
But will an incremental improvement in lending have a positive effect on the
8.1% unemployment rate? Will it impact the foreclosure rate? Will it help
clear housing inventory? Will it help retail sales? I think the answer is not
really, at least not in the immediate future.
TradeMaster Conference
It’s nice to know that stocks can move higher. And higher stock prices can help improve consumer sentiment, which can lead to increased spending.
But a rally that doesn’t include assets fundamental to real economic growth, like oil and steel, isn’t a recovery rally. It’s a relief rally. And that is destined to be temporary.
We’ll be discussing these issues in more detail, with charts and specific investment opportunities in an upcoming TradeMaster video conference that will air on March 25. Here’s a registration LINK if you’d like to sit in.
In the meantime, I will continue to do my best to keep us on top of what’s driving the stock market day to day here in Small-Cap Daily.
