How Long Can the Bank Rally Last?

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!”

However, maybe I am 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.

By Mock The Market