I came across this call by David Kostin, Goldman Sachs’ (GS) Chief US Portfolio Strategist, in which he says the S&P 500 could have 12% upside to 1,400 by year-end. This part in particular caught my eye:

Bullish signpost to watch for: (a) Moderation of losses and successful capital raisings for S&P 500 Financials; (b) Steps taken to resolve the GSE crisis; and, (c) Pockets of stability in housing. Key downside risks: (a) A significant, negative event in the Financials sector; (b) Evidence of a global recession; and (c) Unexpected negative US macro news.

The idea that capital raises by major financial firms will go a long way toward dispelling rumors and realization of chaos is not new. But a key component of any successful capital raise is that the deal would have to be done at a reasonable cost to the issuing institution. I’m finishing up a presentation on the market outlook for the BC Investment Club, and one of my leading concerns (besides the obvious difficulty of raising capital) is the costliness of any financing that might be obtained.

As was noted in mid-August, even traditionally well-regarded financial firms like Citigroup (C), American Express (AXP), and AIG have to offer paper at huge spreads (risk premiums) to Treasuries. Citigroup priced a deal at Treasuries + 300 bps, American Express at Treasuries + 400 bps, and AIG at Treasuries + 475 bps. Wells Fargo (WFC) did a five-year callable preferred offering at Treasuries + 550 bps, and CFO Howard Atkins seemed happy just to have gotten the deal placed, noting that at least Wells still has access to the capital markets.

Of course, these kind of spreads are becoming systemic as this chart (from before the magnitude of Lehman’s troubles became known) shows:

But, of course, there is the huge caveat that Kostin added – namely, “a significant, negative event” involving one or more financial companies.