Regular readers of TPC know that I called for these capital raises long before any of these financial shenanigans began to play out. I have nailed the government’s every move before the market had any idea what was really going on. Despite being bullish at the March lows and turning more cautious in early April, I knew shorting the banks was out of the question as the government was in complete control of this rally. For a full analysis of how the government just drove the stock market up 40% in 9 weeks please refer to this post. The government has just unloaded an incredible amount of ammo into every single bank bear on Wall Street. The short squeezes in the banks have been unbelievable. The XLF is up 124% since the March 9th bottom. My March 10th bank buy call is something I wish had had more faith and money invested in, but hindsight is 20/20. The government has accomplished their goal. They’ve created this fictitious environment of banking strength where the institutions can now turn to the markets to raise capital – as opposed to turning to the angry taxpayer again. It worked beautifully and the U.S. Treasury should be applauded for their hard work, market manipulation and saving of taxpayer dollars. Unfortunately, I fear the taxpayer is not done giving handouts to the banks.
The stress tests were the final great government mandated bank squeeze in my opinion. The government can now step out of the market’s way and let things return to some semblance of normalcy. Unfortunately for the banks these stocks are going to start trading on their fundamentals again rather than anticipation of phony government intervention. Will they be able to hold up? Or will they crumble under the ever increasing weakness of their cash flows?
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.