Are banks really improving?
Not only that, but Federal Deposit Insurance Corp. Chairman Sheila Bair says "we are past the crisis stage." Treasury Secretary Timothy Geithner also said recently, "The vast majority of banks have more capital than they need to be considered well capitalized by their regulators."
Time to jump into the banks, right? Wrong. There are many conflicting views and information out there, and if anything, now is the time to be more than cautious.
Let's start with bank earnings. While some financial institutions indeed showed significant improvement, others resorted to some creative accounting to boost up their results as Peter Cohan demonstrated, which left investors and analysts scratching their heads in distrust and even hitting the Sell button on some occasions.
Then there is the upcoming, much-talked-about stress test results. On Wednesday, Geithner began disclosing some information from the stress test, and while he said the aforementioned, he also acknowledged that banks could face hundreds of billions of dollars in additional losses. On Friday, regulators are expected to start sharing more information and reveal much of the results on May 4.
The assumptions of the stress test seem to be similar to those analysts use, according to The Wall Street Journal, and taking into account a 10.3 percent unemployment rate, analysts at Westwood Capital LLC have figured out the cumulative losses from the different segments of banks operations of $240 billion for 13 of the banks.
Bank analyst extraordinaire Meredith Whitney is quite worried about regional banks, saying they may struggle to pass government stress tests because of their commercial real estate investment. But it's not just regional banks she's concerned about. "I am staying away from bank stocks still," she said, expecting hits from commercial real estates and credit cards next.
Whitney doesn't trust banks balance sheets and with state and municipal budgets under intense stress she is so sour on the economy she said, "When the government gets under duress and they can't raise taxes, they have to starve the beast."
She's not alone. Economist Nouriel Roubini is pretty sure we'll find the bank losses are much more than predicted. "It looks ugly for every one of those 19 banks, let alone the smaller ones," Roubini said. "So it's going to be ugly for the financial system."
As for bank stocks and the recent rally, similarly many experts see a sharp pullback in US financial stocks, saying financials are actually not even quite as depressed as they may seem.
Positive headlines about financials certainly helped spur a rally and made many feel good about the prospects of the financial system. All indications, however, point to the contrary. Still, sometimes momentum and perception can be enough to boost matters, even if it's artificial at first. We can only hope there is enough in those recent headlines to support a financial system recovery.
Disclosure: Have been trading BAC and C. Long both today.