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Vital Signs Improving for Financial Stocks

The vital signs for the financial markets continue to improve. The latest indicators include the number of successful public stock offerings floated by financial institutions, the uptick in home sales, and reported profits by some of the largest banks. .

Morgan Stanley ($2.2 billion), JPMorgan ($5 billion), and American Express ($500 million) all have common stock offerings on the street. This year we will see more new stock offerings from financial institutions than in the past 5 years combined. Just six months ago these same financial institutions could not have raised this amount of capital because fear gripped the market place and investors would not have taken on the new shares. The recent success of these offerings points to a significant upswing in investor confidence.

The second indicator of improved health is the very recent uptick in home sales. The National Association of Realtors reported today (June 2) that its seasonally adjusted index of sales contracts signed in April rose 6.7 percent to 90.3. This is the largest single month increase in 8 years. Knowing that faulty home loans were the driving force behind the financial crisis, a turn-around in the home loan market is vital to a recovery in the financial markets.

The FDIC reported on May 27 that the nation’s largest 19 banks, the target of the stress tests, earned a combined first-quarter profit of $7.6 billion, compared with a loss of $36.9 billion in the fourth quarter of 2008.

Of course the patient is not entirely back to “good health” even though vital signs are improving. The FDIC reported that 21 banks failed in the first quarter, the highest number since 1992's fourth quarter. It also said that the number of "problem banks" rose to 305 from 252 a year ago. We are seeing a divergence between good banks and bad banks. The amazing thing is that many of the banks that would have made the “bad” list just 5 months ago are now showing signs of vibrant health. Some analysts speculated that the nationalization of Bank of America and Citi Group was the only way to save them; now it appears that free enterprise system is able to do what the critics thought impossible without a government takeover.

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