Email of the day (1)
Comment of the Day

November 07 2011

Commentary by David Fuller

Email of the day (1)

On American banks:
"Do you have an opinion of American banks? They have been punished in 2008 and 2009 and at present they are suffering the leash effect of the European stress, but, their Q results have been pretty decent and the slow recovery on home prices at the US can give them more room to improve their reserves.

"I would like to know your thoughts please. Thank you for your great service and have a nice weekend."

David Fuller's view Thanks for your comments on the service and for an interesting question.

Before answering, I should declare a personal bias. While I have often enjoyed and learned from some of the excellent research reports produced by banks, I am not an admirer of the banking industry. I feel that the financial transactions of banks often give capitalism a bad name, and without capitalism the global economy would be in a much bigger mess.

Underperforming recovery candidates are speculative by definition. Nevertheless, you provide some good reasons why US banks might recover over the medium to longer term. Additionally, we could not have an economy without banks and the Fed continues to recapitalise them through the yield curve.

The S&P 500 Banks Index (weekly & daily) bottomed with a key day reversal in August. It also rebounded from a test of that low with an upward dynamic in early October. There is some lateral resistance evident near 130 but if / when the Index hurdles that level a further recovery will be signalled.

The weekly chart indicates a 'sleeper' base formation and the main question in my view is the length of time that this formation is extended before it eventually supports a recovery? That is very hard to guess but further strength by the S&P 500 Index (weekly & daily), which is currently probing the underside of this year's top area, would pave the way for an additional recovery by US bank shares.

Meanwhile, one receives some compensation for the wait because all of the constituents of the S&P 500 Banks Index pay a dividend. When recovery candidates eventually recover, the percentage move is usually good given the low starting point.

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