Positive Spin On Banks Maybe? Unlikely.

As more and more banks have announced and released earnings which have been bad at best, I get the picture that investors are hoping that the rate of credit deterioration slows down. So far as unemployment has soared and housing foreclosures continue to accelerate there is really no slow down in credit failure.

But, one thing that needs to be monitored closely, is that so far banks have taken massive reserves unto their balance sheets to offset losses in loans/mortgages/credit cards. In some few cases (JP) they have over reserved, many cases like Wells this morning, they have under reserved. Just keep in mind that the broader markets have started to rally a bit seeing that we are in the midst of a V shaped recovery. I don't see that way. But the rational on owning banks is that once the economy picks up, employment improves, foreclosures stall, all of the potential reserves that were taken in case losses do occur have got to be bled back unto the income statement, creating bottom line net income.

This is what exactly happened in the early 1990's. Banks over-reserved for losses, then economy picked up, credit expanded, and the banks were taking reserves and funneling the reserves back as net income.

This is my only rational to ever own a single share of a US Financial Institution ex Goldman.

If the following happens in the next 1-2 Quarters, you will need to own financials.

1-Economy Improves - Better GDP revisions...This is going to happen by 4Th Qtr 2009
2-Unemployment slows down - Not going to happen until 1st Qtr 2010 at earliest.
3-Employment picks up - Not happening for a long time...1st Qtr 2011 at earliest.
4-Foreclosures stall - Not happening until 2nd Qtr 2010
5-Home Prices rise - Not happening for 2-3 years at the earliest

The big difference now from the early 1990's is that back then consumer credit was in the 4th inning of expansion, that bubble has definitely popped. I just don't see other then massive Quantitative Easing to re inflate the credit bubble for consumers, will we see consumer credit expand this time around. So far everything has been done to reflate the financial/commercial credit system. A consumer reflation QE just basically defuses the bomb for a later date.