Banks Are Behind the Rally

Oct.19.09 | About: SPDR S&P (KBE)

If you are wondering what lead the recovery of broad stockmarket indexes, look no further than the chart below (click to enlarge). A comparison of relative performance between S&P 500 (yellow line) and the KBW bank share index (black line), it shows that banks rose almost three times faster, since the market's nadir in early March 2009.

BKX +160% vs. SPX +60%

The reason for such outstanding performance is quite simple: Washington's credo of "too big to fail", i.e. trillions in public bailout money. Once it was fully understood just how far the Fed and Treasury were willing to go to prevent "our crowd" finance from going under (sorry Bear, sorry Lehman you weren't "in"), the rebound happened almost instantly.

And it's not only happening in the United States. In the same period bank shares have broadly outperformed in Europe, too: the DJ EURO STOXX (Banks) index is up 175%, whereas the broader index is up 60%.

DJ EURO STOXX (Banks): + 175%

DJ EURO STOXX 50: +60%
Charts: STOXX

Such nearly identical behaviour between American and European markets is not a coincidence, of course. Even though the EU does not possess a common Ministry of Finance (Dept. of Treasury), it does have one European Central Bank. And it is acting just like the Fed - at least as provider of ultra-cheap credit to banks in return for dodgy collateral.

As of last week, the ECB's own balance sheet has grown 50% to 1.8 trillion euro versus 1.2 trillion in the same week in 2007. The entire increase has come from long-term refinancing operations (i.e. term lending to banks against collateral) and "other" securities held for its own account.