Saturday, August 22, 2009

What the Stress Tests Didn’t Predict

FINANCIAL stocks have more than doubled from their March 2009 lows. And with autumn — generally a rocky season for the markets — fast approaching, it's a good time for a reality check on the banking sector. The goal: to determine whether fundamentals in the industry support the rocket-fueled surge in bank shares.

To be sure, the stock market and smart money often try to anticipate recoveries long before they are evident in the numbers. But a "relief rally" — that is, the exuberance that accompanied the fact that our economy appears to have avoided another Great Depression — won't have the same staying power as a move based on solidly improving operations. So understanding what's going on in banks' financial statements is worthwhile.

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