Some think we'll start to recover with leadership in the financial/banking sector of our economy. We did witness some positive signs this past week, and the stock market responded quite favorably.
Be careful with your interpretation of the stock market, however, as this may simply be a short lived rally within an existing bear market--lasting only a week or a couple of months before the next stock market decline.
The spark that ignited this latest stock market rally was comments from Vikram Pandit, CEO of Citi, telling employees they will turn a handsome profit in the first quarter, their best money gain since 2007. This was followed up by similar comments from Ken Lewis of BofA and Jamie Dimon of JPMorgan.
Why are they so rosy all of a sudden? Has the sky cleared--and all the woes been erased by the $700 billion TARP bailout of last fall?
No, those mortgage defaults are still on their mind. While TARP and other government measures are helping--and we may see revision to the mark-to-market accounting rule that I wrote about a few days ago--there are still significant hurdles for the banking industry.
BUT, there is some very good news that banks are now starting to report. Banks make money on spread. They borrow at low interest rates--and then lend at 1, 2, 3 or more percent higher rates. This is a significant source of operating profit, and since last year, they have gone about their normal business of leveraging for profit.
Here is a chart showing how much banks pay depositors, in general, for short-term certificates of deposit (CDs)--and how much they charge home owners these days--who are happy to either obtain new credit or refinance their homes at relatively low interest rates.
Looking at this chart another way, in terms of spread, here is why banking CEOs are so pleased with their bottom line these days. This spread of over 4 percent means big bucks for banks--and it reveals a possible turning point--which we will all applaud as we look for a recovery from the current recession.
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