Breakout

Money in the Banks: How Financials Can Extend the Rally

Breakout

It was kind of like that lost Christmas package that arrives a few days late, only in this case, the gift didn't arrive in the mail -- it came in the form of a press release from Basel, Switzerland.

The present was even bigger than expected, and the banks receiving it were overjoyed. Known as the "LCR" (liquidity coverage ratio), the revised capital requirements financial companies will have are not only easier, but the lenders subjected to them will get an extra four years in which to comply, out until 2019.

The news was the latest shot in the arm for the beleaguered banks, says Kenny Polcari, a NYSE-based floor trader and director at O'Neil Securities. "It's a group that we need to lead," he adds in the attached video, pointing out that revitalized banks carry broader benefits for the markets and the economy.

Even before the global banking group's weekend policy revision, financials had been on a tear, comfortably outpacing the markets over the past week, month, quarter and year. In fact, one-third of the 81 stocks that make up the financial sector (XLF) had gained 5% or more in the first three days of trading last week, sprinting ahead of the S&P 500. While some market observers have questioned whether the bump in the bank stocks might be looking a little toppy, Polcari and others continue to like the group.

Out of 10 sectors, FactSet pegs banks at the top of the profit growth list for the fourth-quarter earnings season, which begins with Wells Fargo (WFC) on Friday morning and continues with Goldman Sachs (GS), JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C) and American Express (AXP) next week.

"Certainly, some of it (the good news) is already in the banks," Polcari says. And more could be coming if earnings results prove favorable, housing continues to improve, and interest rates resume an uptrend that recently pushed the yield on the 10-year Treasury note to an eight-month high of 1.97%.

But all is not perfect in the financial patch, as evidenced by Monday's 10-way settlement over foreclosure practices that will see lenders paying out another $8.5 billion, as well as a payout to Fannie Mae by Bank of America that CEO Brian Moynihan calls "a significant step in resolving our remaining legacy mortgage issues, further streamlining and simplifying the company and reducing expenses over time.”

And of course, even as hot as bank stocks have been for the past year or two or three, the benchmark KBW Philadelphia Bank Index (^BKX) is still more than 50% below its pre-crisis peak in February 2007.

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