No Recovery Until Regional Banks Come Back to Life

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Includes: IAT, KRE, RKH
by: Larry MacDonald

Last week was a busy one for bank failures in the U.S. The FDIC shuttered six, bringing the total for the year to 130 (more than the previous 16 years in total). “Nice to see the credit crunch is over,” economist David Rosenberg of Gluskin Sheff notes facetiously in his Dec. 7 commentary.

Strategist Don Coxe wrote in his November Basic Points report that the thousands of regional banks in the U.S. are an important transmission mechanism for Bernanke’s monetary policy. Without them, all those printed dollars have a limited impact on the real economy. But with their balance sheets still devastated by declines in the prices of real estate properties, their capacity for making loans is restricted. Indeed, the banks are so stretched they are failing in droves.

A telling sign is the lagging performance of the KBW Regional Bank Index ETF (NYSEARCA:KRE).

There will not be the kind of sustained U.S. economic recovery that will drive a sustained U.S. bull market until the KRE begins to outperform both those of the biggest five banks and the S&P 500 index,

Mr. Coxe states.