Can the banks be fooling us again? Or is this the breakout that can make these companies leaders? Much has happened this week, so let's detail it:
1. The yield curve has been changed by the Fed, and that makes the banks more willing to lend, because they make more money on the net interest margin, which has been awful. That's a typical way to value banks, and the bank buyers are heartened. With a better yield curve, the banks will be willing to lend more and lose more. It changes the risk/reward.
2. Although widely expected, the Federal Reserve's decision to be vocal about the banks' ability to return capital in the form of dividends makes some investors salivate, because these banks have been defenseless wards of the state. That could be over. This news is something that people have waited for for so long, and most had given up on it until next year.
3. C is breaking out, and that allows for the government to sell stock aggressively. Lots of people were opining that the government couldn't finish selling stock this year. They can finish selling today if they want.
4. The technicians are powerful in this market: the BKX is breaking out here, and that's propelling the big BKX stocks even further, stocks like WFC and JPM in particular, but also the smaller banks. These stocks are heavily influenced by the SKF, which is plummeting quickly, and that's the big 2x short bet against the group.
5. In a market where nothing is cheap anymore, people can embrace the banks simply because many of them are at book are near it. If asset values are going to be boosted by the Fed, the banks have lent against assets that had been losing value. That could be over.
6. The shorts overreached. All over the Street, the shorts have been blasting out the put liabilities of these banks as if they are really going to have to raise equity to pay for them. The shorts have planted stories all over the media, from the TV to the blogs. The stories are outrageously one-sided, because they presume the maximum in losses and they all presume instant payouts. Of course, the opposite is occurring: It's all going to be drawn out in litigation. Brian Moynihan is a lawyer, and the CEO of BAC laid it out pretty clearly this week that his bank isn't paying. He was forceful -- for once -- and the shorts seem to have heard him.
7. The previous month saw more towel-throwing in the group than I have seen in a long time. The give-ups were so big, and they came from hedge funds and mutual funds. They finished ahead of QE2.
8. Fed data just coming out has shown a nice pickup in commercial and industrial loans. We have lacked loan growth throughout this period.
9. Consumer loans haves started to flatline after having fallen off a cliff in the rest of the year. More loan growth.
10. Financial regulation is done, and the proponents of the most draconian parts of it are retiring or have been retired. Headline risk has been lessened by this election, for certain.
These are all new. One week. One simple four-day period with so much mystery cleared up and so much sense of opportunity. It is no wonder the banks are picking up the baton of market leadership. They don't need to raise capital. They can pay capital back. Housing has bottomed according to all surveys except the one most quoted by the bearish media: Zillow. It is that moment. And the bulls and bears are seizing it.