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My first look at the FTSE charts at midday reminded me of Churchill’s “V for Victory” sign as it resembled the statesman’s forefinger and index fingers raised aloft. The 100, the 250, and the TechMARK all resembled a huge “V” as an early morning slump reversed its course and the indices rose to opening heights.
The 100 is at 6,587.10, the 250 is at 14,704.57, and the TechMARK is at 2,884.87. The only reason the AIM 100 did not look the same way is that it experienced two drops this morning, so it looks like a “W”. That’s a good thing, because it still returned to it opening heights.
The turnabout appears to have been fueled by Bank of America’s (NYSE:BCA) quarterly earnings report giving a boost to the entire banking sector. The bank reported a 63% increase in profit for the second quarter of 2013, garnering $4.01 billion versus $2.46 billion in Q2 2012. Earnings per share rose from 19¢ to 34¢, beating expectations by a considerable margin of 36%. Although the bank has embittered many Americans because of its tightened lending practices since 2009, the bank, based in Charlotte, North Carolina, seems to be doing the internal, operational things that it needs to do to make the business itself sustainable – very sustainable, in fact.
When Bank of America acquired Countrywide Mortgage it had anticipated continued growth in the mortgage lending business, until the immediate and very big “OOPS” that followed with the subprime lending crisis. The U.S. is still not out of recovery from that. Mortgage lenders aren’t making any money, but their psychiatrists certainly are. The (un)fortunate fact is that the banks need to become healthy before they can afford to lend freely again. Apparently Bank of America is well on the way and is an inspiration to investors in the banking sector as its shares rose above the $14.00 mark this morning (EDT) for the first time since 2011.
Of special note is the fact that, due to the tightened lending practices, BAC was able to reduce it reserves for bad debt by $900 million, even though the mortgage lending arm losses increased by nearly 26% from $744 million to $937 million.
A spokesman for ETX Capital noted that BAC’s performance is “a reaffirmation that U.S. bank earnings are coming strong. The numbers from Bank of America seem to be pretty clean and the market is reacting to that.” Seventy percent of the respondents to a recent survey by Barclays agreed, indicating that they agree that the FTSE is “well positioned for a recovery“.
If nothing else, Bank of America is proving that it can be done. That gives investors in the U.S., the UK, and the world, confidence that the BAC efforts can be replicated by cutting expenses and selling off non-core assets. It is also worthy of note that when regulators proposed higher Basel III capital requirements for U.S. banks this past week, only Bank of America and Wells Fargo have already exceeded the proposed requirements.
Now all eyes will be on Ben Bernanke’s announcement today regarding the Federal Reserve’s next moves. I expect that he will continue to exude (well, Bernanke doesn’t exactly “exude” anything) a continued attitude of optimism both in words and actions.
In some ways, it is kind of scary that the news at one bank can have so much effect on the entire sector and that the entire sector can have so much influence on the market at large. For sure, it has been scary since 2008. If today is any indication it might become good news again.
