Take a look at this--it appeared following my morning blog post: Bove: Bank Stocks Running on Fumes, Expect Pullback from CNBC.com.
Bove says bank earnings will not improve in the third or even fourth quarter of this year. To wit: "Many of these companies will show losses".
Now, all of us here at LandColt Trading appreciate open minds and we know Dick Bove covers this sector as well as any analyst on the planet. But, with that said, we think he is wrong this time.
Reason: Economic Growth. Yes, we know there's a recession, but all signs are pointing north. What does this have to do with banking? Well, everything.
And, here's why: Banks offer credit cards and 70% of Gross Domestic Product in the USA comes from the American consumer. When there's economic growth, then people are spending money, thus using bank credit cards that help the bottom line.
Second, economic growth means higher interest rates. Look for rates to begin creeping up--regardless of what Captain Ben and the rest of the FOMC do tomorrow. Additionally, a stronger economy typically will show credit losses decreasing.
All of this signals great news for banks.
Take a look at the S&P Banking Index. This Index is made up of notable banking stocks, such as Regions Financial, M&T Bank, BB&T and Wells Fargo. The Index has been on fire lately--+28% month-over-month. And, Bove is probably recognizing the quick run-up as a means of pulling profits. However, his forecast is based solely on stock performance and not fundamentals. If we were focused exclusively on performance, we could simply take a look at the fact that this Index is -35% year-over-year.
But, is the economy improving? Is this a positive for the banking sector? Are we seeing improvements in the household balance sheet? You know the answers here!!
Todd M. Schoenberger, Managing Director
LandColt Trading, Inc.