Friday, August 26, 2011

Banks not out of the woods despite the BAC deal

As the news of the Berkshire/Bank of America deal hit the tape, BAC rallied and so did the banking sector. I had written about the systemic risks that Mr. Market was indicating in the banking system, how does this BAC rescue change the picture?

The answer is, "Not very much."

Take a look at the relative performance of the BKX compared to the market. Notwithstanding the fact that the Buffett rescue was a sweetheart deal (not everyone can get a 6% coupon on preferred shares senior to the common, so that if everything blows up the common shareholders eat the loss first, plus Buffett gets common share warrants as a "sweetener"), the banks have rallied but remain in a relative downtrend. I would like to see the relative downtrend broken and, ideally, a rally above the relative support line (which has become resistance) broken in June.

The performance of the Regional Banks, which are less exposed to European sovereign risk,  tells the same story. This was a nice rally, to be sure. But it was not enough to change the picture of a banking sector that is deteriorating.

Let's see if Bernanke can ride to the rescue, but I am on record as stating that such a possibility is doubtful. Add to the equation the observation that corporate bonds spreads are starting to blow out, Mr. Market is telling us that the systemic risks are rising in the financial system. Until the banks can stage a significant follow-through on the rally on Thursday, I remain of the opinion that a Euro-disaster is still menacing the global financial system much in the same way that Irene is menacing the US east coast.

1 comment:

Candy Matheson said...

Excellent article...thx!