Commentary

July 14, 2009 (FinancialWire) (By Philip Holmes) — Stocks ended up on Monday as investors betrayed optimism while awaiting upcoming earnings news from big banks including Citigroup (NYSE: C), Bank of America (NYSE: BAC), and JPMorgan Chase (NYSE: JPM).

The Dow Jones industrial average gained 185.16 points on the trading day, to close at 8,331.68. The Standard & Poor’s 500-stock index rose 21.92 points, for 901.05, while the Nasdaq composite index closed at 1,793.21, up 37.18 points.

Its earnings season, and investors are bracing for news from big players like Johnson & Johnson, IBM, General Electric and Google this week. There will also be reports on housing starts, retail sales, the producer price index and industrial production. But it’s the banks that have everyone’s interest, in more ways than one.

Investors are waiting to see if last quarter’s strong performance by the banks showed renewal and recovery, or whether they were an aberration. The recovery of the broader economy may depend on getting the right answer.

One issue in question is the UN-TARPing Effect, or how much will banks’ balance sheets be hit by the effects of buying back preferred shares and warrants issued to Treasury.

On the plus side, we expect to see some positive results from the quarter’s uptick in mortgage refinancing activity, coupled with some of the big financial firms’ continued success at underwriting sales of debt and equities. CNNMoney’s David Ellis, citing data from Dealogic, said “Equity underwriting volume alone soared 666% domestically to $105.6 billion from $13.8 billion in the previous quarter.”

The big earnings calls kick off Tuesday, with Goldman Sachs weighing in before the market start. Analyst Meredith Whitney has reportedly taken a shine to Goldman, and the bulls were having a snort on Monday. We’ll see. Bank of America and Wells Fargo are also expected to turn in some good numbers.

But Citigroup and Morgan Stanley may disappoint. According to CNNMoney, “After logging its first period of profitability in 18 months last quarter, Citi is expected to report a loss of more than $1 billion, or 31 cents a share, when it reports results on Friday morning. A loss is also expected for investment bank Morgan Stanley, which reports next Wednesday.”

Of course, good news from continuing operations could be more than offset by balance sheet bombshells. Many economists felt that the assumptions inherent in the recent “stress tests” were too lenient, and recent data has proved their fears well-founded. Real estate values continue to decline as unemployment continues to soar, testing the “bad scenario” numbers plugged into the tests. Add to this the fact that savvy players have yet to embrace the term “legacy assets” when describing the real-estate related toxic waste still clogging the system.

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