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Saturday, 16 December 2017

All eyes across the pond as banks show they can deal with stress

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Anthony Peters, SwissInvest Strategist

This morning the British press is full of pictures of those old mates, Dave and Barry, watching some hoops and looking mighty relaxed in the process. The former must be tickled pink that he got to ride in Air Force One – not a lot of people do – …

and the latter probably feels great about the rebounding economy, the growth in job creation and the persistent inability of Mitt Romney to carry the GOP candidacy.

Let’s face it; the crazier the Republican candidate, the happier O’Bama will be. Rick Santorum captured Alabama and Mississippi last night which must leave Newt Gingrich on the ropes. No doubt the time has come for him to throw in the towel and his weight behind Santorum.

This could kill off Romney and pave the way for a classical one-term President to become a two termer by default. As little as I have been impressed by the White House incumbent, even I have to admit that I’d probably find myself forced to concede to something of a tendency to err on the side of the devil I know.

Meanwhile, as Barry and Dave were munching tacos and chilli dogs, US investors were buying the living daylights out of financial stocks on the back of the stress test results on the key financial institutions. Don’t get me wrong; a three or four percent rally in bank stocks at this time means very little in the greater scheme of things, but if your first trade of the new year had been to buy Goldman Sachs, you’d have paid US$92.79; yesterday it closed at US$124.54.

Crisis over? Not yet…

That represents a return of more than 38%. Impressed? How about the lowly and troubled Bank of America which closed last night at US$8.49, a 58% gain on the US$5.75 the stock would have cost you, had that been your first trade of the year. Does this all mean that it is “crisis over” – if it all started with the banks, is a recovery in bank stocks a sign that we can bury the past and finally move on?

Barely; first of all, we should remind ourselves that even after the grand rally of yesterday, bank stocks are only trading back at levels we saw in August last year and that longer-term holders are still utterly stuffed.

Goldman might have done quite well as the stock never traded much above US$250, even in the heady days, and so is half of what it was worth. However, Citicorp, now at US$36.45, peaked at US$555 in 2007 while Chuck Prince was still dancing and Bank of America traded at US$53 while Ken Lewis was having his teeth whitened and was working on his perma-tan.

This rally looks like it has legs. Forget the value; follow the momentum

Nevertheless, there is something positive in the US banking system, not least of all in that the stress tests did nothing other than to check whether they could fight the last war again. Rather than trying to set utterly unachievable targets, the Fed wants to help to get the system running again. Citibank’s failure to pass was merely a matter of the way in which it wanted to begin to pay dividends again and an adjustment to its strategy of rewarding shareholders would have seen it pass.

The US understands capitalism and it understands that unless shareholders get rewarded, they will simply not put up capital. There is precious little sense in making banking economically uninteresting and then being surprised that the banks can’t find the capital base needed in order to lend.

In a wonderful article titled: “We may be going to hell in a handcart, but it has little to do with absent credit” in the Daily Telegraph yesterday, Jeremy Warner argues coherently that the politicians have to move on and get off the banks’ backs. The US stress tests appear to me to more or less close the subject on that side of the pond whereas in the UK we still have to contend with the Secretary of State for Business (who came up with that title for him?) Vince Cable who still thinks that whipping banks will get the Liberals re-elected.

I can see how the old Liberals and the old Social Democrats who merged to make up the current party still don’t gel and I also understand clearly why the party colour can be nothing other than yellow

Having followed their Spring Conference, I can see how the old Liberals and the old Social Democrats who merged to make up the current party still don’t gel and I also understand clearly why the party colour can be nothing other than yellow. If you can find time, do look at Warner’s piece. It cheered me up immensely as I lay in bed yesterday fighting the dreaded lurgy.

I wrote last week that I thought the way the markets had tried to impale themselves on Monday and Tuesday seemed a bit silly and that the low levels of interest rates would continue to drive investors into risk assets; I might not have been wrong. This rally looks like it has legs. Forget the value; follow the momentum.

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