Financial Sector Holds the Key to an Economic Turnaround

What sectors rise when the economy begins to emerge from an economic downturn? The answer may surprise you.

Source: Online Investing AI

The chart above is of the economic investment cycle. The blue is the stock market and the yellow is the economy.

This chart shows us what we should already know, that the stock market is forward looking and typically bottoms or peaks out 6 months to a year after the economy.

More importantly, this chart also shows us that bull markets are formed on the back of a healthy financial and transportation sector.

In other words, to see if this is a sucker’s rally or not, we have to see the financial sector bottom out and move higher.

This makes sense. Money is the lifeblood of the economy. If banks aren’t lending it, then the economy can’t expand.

Today, the big question is whether banks are seeing a sustainable turnaround. Wells Fargo (WFC) announced a $3.3 billion profit and Goldman Sachs (GS) made over $1 billion.

But the problem with banks isn’t their ability to make profits in a low interest-rate environment. The problem is the valuation of the mortgage-related assets these banks have on their balance sheet. Banks are basing their leverage on the value of these assets.

If these asset values decline, then banks must write those assets down and raise more funds or deleverage to meet capital requirements.

In other words, earnings or not, banks still have more to do in order to be considered “healthy”. That means this current rally should be one for the “suckers”

Comments

[Fitz919]

The author hasn't been watching the news for several weeks.

Mark to Market rules have been relaxed, those formerly troubled assets, are no longer a drag on financial institutions, they are a huge boost. Since they can now be valued as high as the banks want them to be, they can post profits perpetually. It's that simple! You want to see bigger profits, they just crank up the value a few more knotches every quarter.

Remember Geithner's big public/private partnership plan...it's DOA.
With banks being allowed to value those assets any way they like, there is no way to structure a deal that will get them to sell.

2009 Apr 19 02:52 PM

[AndrewBaker]

The whole financial sector has had Hans Christian Anderson collaborate with Washington Irving to produce fictional figures of which great note seems to be being taken. Yet it will all end more like an Edgar Allan Poe story, I'm sorry to say.

2009 Apr 20 08:02 AM

[Allan Frain]

"Financial Sector Holds the Key to an Economic Turnaround"

The Financial Sector, unfortunately, also holds the key to the US Treasury.

As long as policy regarding the current crisis addresses the "need to restore the Balance Sheets of Banks"--consider that they continue to hold the keys to Congress, the Administration, and the media.

2009 Apr 20 09:20 AM