Citigroup: Financial Fiscal Cliff Bounce Winner (Update 1)
Updated with market close data and additional information throughout.
The Dow Jones Industrial Average (^DJI) was up over 100 points, while the S&P 500 (SPX.X) and NASDAQ Composite (^IXIC) indexes each rose over 1%, as investors celebrated a softening of the position of Speaker of the House John Boehner (R-Ohio) in his budget negotiations with President Obama.
President Obama has insisted that as part of a deal to raise federal revenue and cut spending, in order to avert the Fiscal Cliff, federal income tax rates on couples earning over $250,000 a year must increase. Boehner and the Republican leadership in the House of Representatives had offered to limit deductions and certain tax loopholes in order to raise revenue, with no tax rate increases.
Boehner on Friday said he would support higher tax rates for people earning over $1 million a year. Spokesmen for the president and Boehner both said on Monday that leaders were continuing their discussions at the White House.
Bank stocks lead the market. The KBW Bank Index (I:BKX) was up 3% to close at 50.62, with all 24 index components showing gains of over 1%.
Large banks showing gains of nearly 4% included Bank of America (BAC) , with shares closing at $11.00; Wells Fargo (WFC) , which closed at $$34.38; and PNC Financial Services Group (PNC) , closing at $57.87.
Writing for Real Money , Jim Cramer said it was "dawning on people that rates could go higher on a fiscal-cliff deal, and we are eventually going to get a deal. Higher rates mean more room for banks to make money."
Bank of America
Nearly all of the recent U.S. economic reports have underlined a steady recovery of home prices, which can lift all boats among the large residential mortgage lenders, including the "big four" U.S. banks. Bank of America, of course, is the most highly leveraged to a housing recovery, because of the company's mortgage mess mainly springing from its purchase of Countrywide Financial in 2008. Bank of America had $25.5 billion in unresolved mortgage repurchase claims as of Sept. 30. In addition to the many challenges the company will bring to investors making the claims, delinquency rates will decline, and claim balances will also decline as home prices rise. In addition to those benefits, the rising home prices will make short-sales or even outright sales of the collateral properties backing the securitized loans easier, thus cancelling some putback claims.
Atlantic Equities analyst Richard State made the case last Wednesday that Bank of America is solidly capitalized and will be approved to return significant capital to investors after the next round of Federal Reserve stress tests in March, saying the company had "already met its Basel III capital requirements in Q3," years in advance of regulatory requirements.