Weak Economy Should Continue To Weigh Negatively On Large Financials

Includes: BAC, C, IYF, JPM, VFH, XLF
by: Adam Alvarez

In February of 2007, banks were leading a picturesque market. Bank of America (NYSE:BAC) flirted with all time highs along with almost every other financial institution. Five months later, the stock had pulled back 10% while remaining surprisingly under the radar. After a brief rebound that October when the Dow Jones Industrial Average (.DJI) officially reached its highpoint, shares started a drop that marked the beginning of an epic market collapse.

Looking back the obstacles that ignited the doomsday economic environment were quite apparent. From the weakness in banks throughout much of the year in regards to both share price and earnings to the $40 upswing in crude prices, markets could only thrive for so long. Companies could only do so well. Even though it would take almost another year before the word "recession" was widely accepted, the 3,000 point drop in the Dow by September 2008 had left many investors with widespread and even catastrophic losses.

In the first quarter of 2008, Bank of America reported a measly profit of $0.05 a share from an EPS reading of $1.19 the previous year. Even on the heels of such a troubling report, the shares maintained $40 for another three months. All the while looking past the numbers and the horrid economic environment in which banks were left to fall victim. After all, as long as the major indexes seemed strong, the glaring warning signs being issued by individual companies appeared to be nothing major, least of all crippling.

As with all problems or setbacks in life, the ensuing market collapse should have at the very least taught us something. It should have taught us to look past market gains or profits and focus on the basic fundamentals. Sure, there were many positives surrounding the markets at the time. The unemployment rate held below 5% until December of 2007 and under 6% until August 2008. Spending was still strong and the word foreclosure was one in which many could not even grasp. However, the proverbial writing on the wall was there and it was there for all to see.

So what does this all have to do with today's market? Like it or not, there are many things that plagued the economy in those final days that have come back to haunt us once again on a national scale.

First and foremost on the list must be the rising crude prices. Only further fueled by a Mideast turmoil which will arguably never cease, rising crude prices are economically devastating. Especially for a banking sector which has already proven to be absolutely paramount to any sort of sustainable economic progress. If you underestimate the impact such inflation has on the nation's banks, consider the way many traded as crude prices began to fall in July of 2008. From July to September of that year, Bank of America surged 116%, JP Morgan (NYSE:JPM) spiked over 60% and Citogroup (NYSE:C) recovered 61%. Unfortunately, by that point the damage had been done; a damage so severe that even a much needed reprieve couldn't recoup the losses.

Aside from the rising gas prices come a number of other dour economic numbers including a rising trade deficit and soaring national deficit. As easy and nice as it would be to sit aside the trade numbers and label them as unimportant, the $558 billion dollar trade deficit reported in 2011 is nothing to merely look over. Such numbers strangle current growth and downright block hopes of sustainable future growth.

Perhaps even more damaging is the $15.5 trillion national deficit which at some point will unavoidably come to damage more than just the reputation of the national government. In fact, some could argue in many ways it already has.

For now the consequences of a currently unsustainable economic path may remain hidden to those who refuse to look. In that regard, the market is doing a solid job. In three months, Bank of America is up 61%, Citigroup is up almost 40% and JP Morgan has recovered 40% after all three suffered in the second half of 2011 much in the same way they did the latter stages of 2007. However, as seen before, temporary recoveries do little when on the outside there is still so much going wrong.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.