Two seemingly contradictory articles are in the WSJ today:

Dow’s Big Rebound Can’t Erase Doubts

A Serving of Doubt on Bank Valuations

Perhaps we can help reconcile them.

The Dow has recovered from a deeply oversold condition; some of this was the natural elapsing of time, as the panic passed and things moved back towards normal.The economy has not only backed away from the abyss, it has legitimately improved.

But a huge amount of the gains have come from the combination of the bailouts — ill thought out giveaways to incompetently and mismanaged banks — and the massive bloating of the Fed balance sheets. ZIRP, QE and the artificially steepened yield curve are what have created a boom for stocks.

At the same time, Banks have been the laggards in the rally since the August lows, and with good reason: Their true condition is well understood. We know that Bank stocks are not reporting their books accurately. FASB 157 allows them to hide bad loans. The Extend & Pretend approach is well known.

The reconciliation between these two articles is simple: People know that equities have moved higher, and the worst of the crisis is behind us. But the artificial nature of this has them nervous. Recency effect notwithstanding, they are waiting the other shoe to drop once the steroids wear off.

The charts below show the basis of concern:


Bounceback from the Lows, courtesy of . . .

Bank Valuation Remains an Issue

Category: Bailouts, Cycles, Federal Reserve, Investing, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

5 Responses to “Rebound vs Valuations”

  1. VennData says:

    The Obama rally.

  2. curbyourrisk says:

    Let’s get one thing clear….it might have been oversold…but it was coming off ridiculously valuations. Therefor……oversold does not mean unwarranted.

    Fundamentally….does anyone remember that????…..we are extremely over sold. But, then again fundamentals mean nothing now that Ben just prints and dumps dollars on everyone.

    I laugh at the idiots who truly believe 666 was a bad print.

  3. curbyourrisk says:

    I said – “Fundamentally….does anyone remember that????…..we are extremely over sold”

    I mean we are extremly OVER-BOUGHT, sorry

  4. Greg0658 says:

    from a low of 666.79 on March 6, 2009
    as much as the market tried for thee # it didn’t officially happen – that # rounds to 667 .. for historical accuracy
    Feb 18, 2011 to 666.79 x 2 = 1333.58 .. Hello to all the __

    I am not goading you into trying again – really – NOT

  5. constantnormal says:

    “they are waiting the other shoe to drop once the steroids wear off.”

    just so. Trust is an essential part of any market activity. No trust = no activity.

    And why should ANYONE trust that our rigged system is rigged in their favor? It clearly is not (unless you happen to be a member of the TBTF club).