Is It Time to Buy Big US Banks?
01/11/2012 7:30 am EST
So far, 2012 has delivered increasing amounts of news that just may rouse the big financials from their comas, writes Jason Cimpl of Daily Profit.
The market is off to a great start in 2012 as big gains continue to be led by big banks. Major US banks, including Goldman Sachs (GS), Bank of America (BAC), and Morgan Stanley (MS) are the stocks to watch. They will need to take a more prominent role and lead the market higher.
Meanwhile, the US released some positive jobs data late last week. The US added 200,000 jobs, with the private sector creating 212,000 jobs, beating analysts’ estimates of 150,000 new jobs and 165,000 in the private sector.
The higher than expected jobs data confirmed Thursday’s big beat in ADP payrolls. And both those numbers are great for the banks.
The unemployment rate dropped to 8.5% in December 2011, hitting the lowest level since February 2009. The employment figures (except initial claims data) are lagging indicators, and December payroll data is also amplified by holiday hiring.
So last week’s data may not indicate too much about the US economic recovery, but it was good enough to support bank stocks. And since bank stocks are our market leaders, the indices will follow the banks higher.
The rally in big bank stocks is fundamentally driven. In theory, banks make money by lending—specifically when borrowers pay the banks back. In times of economic strife, employment decreases and without a paying job many borrowers are unable to pay back lenders.
An increase in default rates has a negative impact on bank revenue and earnings. But the opposite is also true. When employment increases default rates subside, paving the way for big banks to increase their earnings. Although the pop to employment may be short-lived, the news this week was good enough to keep me bullish.
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