Courtesy of inthemoneystocks.com........
Where do the bank profits come from now?
On March 6th the SPX 500 hit a low of 666.79 and fear of the next great depression was beginning to take hold. Financial stocks such as JP Morgan Chase were trading at $15.00 a share, Bank of America at $3.00, and Wells Fargo hit a trading low of $7.80 a share. The technology heavy NASDAQ was holding up much better than the rest of the market as it did not break its 2002 low of 1108. The financial world was in chaos and fear was spreading like wild fire. Could this have been the bottom? After all there was a new administration elected into office and radical changes were in desperate need. This certainly was a complete 180 degree turn from the last administration. The new President was taking the bull by the horns and making changes faster than any prior president had ever done. He even stated in late February that it looked like a good time to buy stocks for the long run. Hats off to this president as he is certainly a shaker and a mover, but who knew he was also a market timer. WOW!
Wells Fargo was the first bank to announce that they were going to have record profits and the month of January 2009 was a very good month. Yes, the mark to market accounting changes took place allowing banks to show huge gains instead of billions of dollars in losses. Yes, all the banks delayed there earnings releases until these new accounting standards were put into place. Since that event banks have rallied to the moon. JP Morgan Chase has rallied from a low of $15/share to a high of $38.94/share, Bank of America has rallied from a low of $2.53/share to a high of $15.07/share , Wells Fargo has rallied from a low of $7.80/share to a high of $28.45/share, Goldman Sachs made a low of $47.41/share to a high of $151.17/share, and Capital One Financial has rallied from a low of $7.80/share to a high of $31.80/share, just to name a few as there are many more. This has been a rally for the ages on most of these big name financial stocks. The big question will be how are they going to make money like they did prior to 2007 to warrant these stock price levels?
In 2003-2007 banks had the housing boom phenomenon taking place all over the globe to give them revenue. Whether the profits came from people buying homes, new business start ups, or construction loans trickling down to the local hot dog vendor who was expanding. Where are the new loans going to come from now? Banks are still not lending especially to each other. Yes, they are borrowing for practically nothing and are making money off of what they are lending but that isn't very much at this time. What company or individual is even qualified to borrow with the government's unemployment levels nearing 10%? No documentation adjustable mortgages are no longer being made as that was one of the most popular financial products being sold. Companies are streamlining and getting leaner by the minute. Yet financial stock share prices are back to 2008 levels.
While we and the world want and hope for a swift and quick recovery, we just wonder where will it come from? Interest rates have been rising, the U.S. Dollar has been falling, foreclosures are rising, commodities have been soaring, companies are downsizing, and unemployment is reaching very high levels. Where are these new profits coming from? Yes, hope is alive and well right now. However, unless something dramatically changes fundamentally hope will run out sometime this year, and the so called green shoots will be nothing more than a mere catch phrase.
