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Yoshikami: Banks—Back From the Brink

With bank earnings about to released next week, we have another clear indication of whether or not this economic recovery is a mirage or real.

Financial institutions tend to be a good indication of economic activity and, after the disaster we have experienced with banks, the time has come for earnings to show progress towards real growth if this recovery is to believed.

There are two schools of thoughts on bank earnings and the one you believe will depend on your perspective of the reality of today’s economy.

See how each fits for you.

Outside the New York Stock Exchange in lower Manhattan.
Photo: Oliver Quillia for CNBC.com
Outside the New York Stock Exchange in lower Manhattan.

The more negative thinkers believe current bank earnings are artificially high resulting from once in a generation trading revenues after a near depression.

They also state that earnings are artificially influenced by the government stimulus plan and an abnormally low interest rate environment which has limited further real estate losses.

A gloomy perspective to be sure.

The optimists state that bank balance sheets have never been stronger after the massive purge in problem loans that has occurred in the last two years. They further state financial institutions have higher capital levels mandated by the government and the market and, therefore, safer investments.

Even optimistic market strategists who do not believe that we are headed towards a V-shaped recovery believe that financial solvency is much improved.

Our view as usual is that a dogmatic view held by the excessively pessimistic strategists as well as the overly euphoric commentators is too extreme. The reality is things are better but not great and we should not expect a return to the so called "good old days."

Bank earnings will likely be better than the negative watchers believe but not as good as the hopeful commentators expect. Expect a slow recovery in bank earnings as well as a slow, sluggish economic recovery.

In the end, we believe banks are back after avoiding death (for the most part) and will limp back into profitability. That’s a good sign for the economy and the markets and another indication that this economy is more resilient that many have believed.

(*Program Note: Mr. Yoshikami will be a guest on the Closing Bell at 3pm/ET, Wednesday April 14th.*)

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Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com.