The rally continues now for like 5 weeks, question is: is this rally sustainable, or is it a wolf in sheep’s clothing? Wells Fargo and JP Morgan give us the impression the banks have the worst behind them and all the nationalization talk is over. But will stocks continue to rally? I don’t think we will test a new low that is lower than early March, therefore I would say we have hit the bottom. However, I still expect some bad news and more banks raising capital or failing, or if we are lucky, we will have just consolidations happening as opposed to bankruptcies.

The U.S. Producer price index has fallen, not really supporting an increase in consumer demand. But hey, maybe it is just a little too early. What worries me more is that housing prices continue to fall and new house starts are down (Bloomberg). This will lead to more foreclosures and further losses in residential loans. Job losses continue to increase, while not at a pace as fast anymore as in the previous months, the jobless claims are rather high. Unemployed people will not buy houses, will consume less in general and many will probably not be able to pay their credit card bill, leading to more losses for banks from consumer loans. And if banks continue to have troubles, they will likely not be lending much, which will continue to stiffle economic growth. Stiglitz, the nobel prize winning economist, is rather negative (Bloomberg). So is Dr. Doom, but that is no surprise.

Citigroup’s loss is lower than expected on new accounting rule (Bloomberg). You need more than one quarter of good news to convince me however that Citi is now a good investment. The accounting rule change will decrease the losses going directly through P&L, but if credit losses remain high, it will not eliminate the risk of the banks capital base being eroded, as the losses still go through equity. The question is however, as Jim Cramer highlighted, will there now be strong banks like Wells Fargo, that could potentially buy weak ones? If so the US financial industry might not be doomed to collapse after all. I, being an optimistic person in general, do hope and believe so, and I have increased my exposure to the financial sector. Instead of betting on single names, like I have done with our troubled Swiss bank UBS, I am now betting on the entire industry through ETFs. However, building in a hedge is advisable (or diversifying in gold and other safer havens), since I am still sceptical. There are improvements (in terms of getting less worse) and some good news, but also there are still considerable risks. We shall see what the release of the stress test results bring starting next week until beginning of May.