Let’s All Have A Good Week, Okay?

Prepare for another week of what we had last week – a lackluster market moving little bits this way and that. Maybe something will come out of the woodwork to spur the market one way or another, but if all remains calm in the world, keep in mind, vacation time is here.

Given that, let’s take a trip down memory lane, a not so pleasant memory, but an educational one, nevertheless.

It’s hard to overstate the damage that the banking crisis caused financial stocks.

Yup, 2008 was a year to remember. The biggest of the banks were underwater to the tune of trillions and the once powerful slot they filled in the market was as empty as the vast reaches of the Sahara Desert.

At their peak on June 1, 2007, the stocks in the Standard & Poor’s 500 financial sector index had a collective net worth of more than $2.9 trillion, roughly 30 percent greater than that of the next largest group, tech stocks.

Just prior to the collapse, the financials were bigger than big in the market, and they were the power behind the throne, the king being the US economy. And then it all came tumbling down. Toto pulled the curtain back and the weak men pulling the levers of power appeared as nothing more than crooks looking to make the next fast billion bucks.

Then the housing bubble burst, and their market value plummeted by $2.4 trillion, a drop of 83 percent, compared with the broader S&P 500’s 58 percent swoon. When financial stocks hit bottom in March 2009, the whole group was worth just $510 billion, roughly the equivalent of the combined pre-crisis market value of JPMorgan Chase & Co. and Citigroup.

Recalling those memories it is hard to imagine anyone back then talking about the financial sector returning to its former glory, yet there were some, including me.

Starting in the fall of 2010, I began writing in this very column that one should get some money into the financial sector. My reasoning was simple – there was ample room for growth. The problems the financial sector experienced, although horrendous and crippling, were passing and the entities within would recover. They had to recover because of the power the financial sector holds in the US and global economies and the allure they have when strong.

The financial sector stands within a whisker of recapturing the mantle as the $17 trillion U.S. stock market’s heaviest hitter.

The big and small banks are returning to their former heights financially, but this time they are tethered to an enormous set of regulations called Dodd-Frank. Although not perfect and not fully implemented, the key provisions in force have turned the banks from gamblers back to banks again. Banks are beginning to act like banks, which means they are converting their revenue streams from risky derivative based trading to money earned from investing in business and people. In short, the big-bank boys are lending to make their dough.

And, there is still money to be made in the financial sector, even though it is fast approaching its former dollar glory. Simply, this time around, the banks will earn steady streams of revenue that will produce a steady stream of profit and that profit will go back into the stock and back to the shareholder in the form of dividends. The banks will once again become bedrocks of the investment world. This will occur in concurrence with the upcoming global economic renaissance that is underway now because banks will play a key role in that global growth.

Chinese new bank loans and money supply for July came in higher than expected despite a fall in a broad measure of liquidity.
China’s CSI300 advanced 1.2 percent, extending last Friday’s rise after factory output grew in July at its fastest pace since the start of the year

Mexico’s plans to break a 75-year state monopoly on energy could boost flagging growth and double foreign investment, potentially providing the biggest leg-up to its economy since the North American Free Trade Agreement two decades ago.

The world is changing, banks are changing, the global economy is changing, and the market will embrace it all, but before that happens, this fall we will see the last hurrah of the politicos bent on selling the message the US is doomed because of its flagrant and abusive spending habits. As the above economic momentum increases, tax revenues will increase concurrent with in-place spending cuts, and the US debt, the focal point of the fiscal and monetary doomsayers will slowly dissipate.