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Friday, July 24, 2009

Its About the Banks

Bull market talk! Loads of it. Just 2 weeks ago, they were talking opposite! P2 is working its magic I can tell by many commenter's reactions as of late. But bull market it is not. But in the meantime, doubt will creep in and bears will break.

The banks however tell the real story. Since achieving a high in early May, they have limped. Even after all those great "earnings" reports. The stock market never lies. Appetite for banks is low. Banks have issued so many shares of worthless paper its scary and sad at the same time. I suppose the banks will eventually catch a bid. The 50/200 is ready to crossover soon.

Its always been about the banks. It always been about the debt. Parabolic rises, no matter what they are, will collapse under their own dead weight. 64 banks closed this year. The pace seems to be picking up. This is real. The Great Bear is real.

Government can "save" us. Ha! Government is the ultimate consensus group and the last to react. They follow. They will save the banking system only after it has already completely failed. They will fix the nations massive deficit problems only after the debt has been destroyed by natural market forces.

California is issuing IOU's. How can we support $500B in interest payments a year? Its madness! Yearly debt at $1.7 T and thats with great interest rates! The shadow banking system will eat us.

So what happens if interest rates rise to 15%? 20%? Oh there will be a P3 folks.

And they won't be buying stock, and there won't be any "safe haven" in debt. Risk aversion will be the norm. P2 is the last-gasp asset mania bubble the world will blow in many decades. We can only wonder when it will end. We try and connect the patterns.

When those "fund managers" require cash because deficits and budgets and payouts demand them, they will sell. The fear will rise again. The mad rush to the door this time will crush a lot of good people.


  1. as I said in an earlier exclamation, among the four posts you issued Dan every possible outcome has been covered or better yet has been warehoused for future use.

    yes the banks have not been front running the party but have rallied substantially over the last 10 business days. UYG went from 3.25 to 4.25 during the same period.

    I am at a complete loss of direction here.

  2. This guy was bearish until last week. He is bullish now.

  3. RBharol:

    This is an excerpt from the same site that says it all:

    Then overnight, and I do mean overnight, the most unusual two weeks in many years jumped off the launch pad. A Wall Street analyst, Meredith Whitney, upgraded Goldman Sachs to a buy, predicting Goldman’s earnings would significantly beat Wall Street’s estimates. That forecast caught a tailwind in the media, the market surged up, with the Dow closing up 2.3% on the day.

    That was just the beginning. The Dow was then up 7 straight days, and gained 11.3% over 9 days. The Nasdaq was up 13 days in a row, and gained 13% over those 13 days.

    The excitement began in the financial sector as more of the bailed-out big banks reported 2nd quarter earnings that beat Wall Street’s estimates (even though most reports were of sharp earnings declines or even losses). The excitement spread to the tech sector after Intel reported earnings that beat ‘the street’, and continued even after IBM and other tech ‘bellwethers’ released reports of sales and earnings declines. The excitement even spread to sectors that depend on consumer spending, including home-builders and retailers.

    The market has been on fire, seeing no problems. It surged up more than 2% on Thursday in anticipation that Microsoft, Amazon, and American Express would release positive earnings reports after the close.

    They didn’t do that, instead issuing unexpectedly negative surprises. Microsoft for instance reported the first 12-month sales decline in its history, and a big 29% decline in 2nd quarter earnings. And its CFO said “We’re still in tough economic times and don’t see it getting better in the near term”. The company’s statement was that PC sales could see growth during next year. Amazon , American Express, and Capital One also reported negative earnings surprises.

    But although even Wall Street expected a severe down day on Friday as a result, the market hardly blinked. Dave Rovelli, director of trading at Canaccod Adams said, “I thought we’d be down huge today, but no one seems to care. They just want to buy stocks and chase performance.”

    Or even chase non-performance. Capital One Financial plunged in the early going Friday after reporting it had suffered an unexpected $276 million loss in the 2nd quarter. The old investing adage that unexpected quarterly losses are usually followed by more, and the stock should be avoided, was nowhere to be seen. After its initial decline, the dip was apparently seen as a buying opportunity and the stock was soon up a big 8% on the day.

    Meanwhile, there hasn’t been noticeable changes in the warnings of two weeks ago. Fed Chairman Ben Bernanke told Congress this week that “the economy will remain weak for another year or longer”, that “Job insecurity, together with declines in home values and tight credit is likely to limit gains in consumer spending. The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook.”

    Warren Buffett said Friday morning that investors should be bullish on stocks “if they have a ten-year outlook!” Hmm. Most can’t hold onto losses for more than a month or two, waiting for a turn.

    The University of Michigan reported on Friday that its Consumer Sentiment Index declined to 66.0 this month from an already low 70.8 in June. The market didn’t blink.

    It’s been an amazing two weeks.

  4. If there is no safe haven in P3, then what should one do to prepare for the worst (besides shorting the market, of course)? What does the endgame look like -- survivalism?

  5. Hi Dan. Well if its really all about the banks, and I'm not holding that to you, where are they in the Cycle degree?

    The reason I ask, is by looking at the count there is only one more Primary move down and then it would/should correct upward. This would coincide with one more Primary move down in the SPX via a count like Kenny's.


    p.s Phoevos - Try not to fret too much, EW is not a crystal ball or we would already all be rich. The truth is, and it seems a lot of people forget this and the last big wave really drove it home, a count is "best" counted, when it is finished.

    Dan - thinking more about it, it may not be such a relevant question as if it was Cycle A, B would correct up and then C would follow down which would coincide with your SPX count. I'm still curious though where it lies.

  6. GDP numbers are coming next week, friday.
    If they are better than expected, markets will take off to the moon.

  7. What the market has overlooked (so far) is that Meredith Whitney also predicted the unemployment rate to go to 13%. The infamous bank stress tests used a worst case unemployment rate of 10.5%. While the Wall Street mega-banks will continue to make money from leveraged stock trading, none seem to be making money from traditional banking activities like loaning money to customers.

    Of course, the stock rally could last for years before going bust like the last one.

  8. thanks dan.
    you were unstoppable yesterday.
    i also looked at your stockcharts.

    i have two questions.
    1) is BKX in its next leg after topping at 43?
    2) Is bkx going to do catchup with spx, as most indices with divergences have been doing. one lags and the other catches up, esp. on the way up?
    thanks. great work since last evening.

  9. People keep talking about Meredith Whitney's call on Goldman Sachs, yet is was simply her first BUY call ( which was late ) because she was trying to get her new firm up and running.

    The POINT is, is that several other banking analysts were bullish on GS long before Meredith finally got up and running.

    Moreover, ROTATION has been very strong in this market and that is usually the primary hallmark of a Bull move. This key concept cannot be stressed enough.

    The Banks may have started this move off the March low, but it has been the CYCLICALS and TECH that have lead the way with this move off of 869.

    One cannot merely place emphasis on ONE single group of stocks, or ONE single indicator. We trade a market of stocks, and not a stock market!

  10. I love it when a plan comes together - don't you? Well done DE.



  11. wags yes, but banks are the key to going forward. For America is broke and getting broker so a bull run will have to be on the back of another great bubble...provided by banks of course.

  12. Linus i am not sure what will happen to BKX. So far it has behaved and not broken any EW rules.

  13. Golf buddies.
    My group, which are high net worth executives are convinced the worst is past and they are getting back in the market. They are hoping for a pullback to go in larger. they are afraid of missing s&p 1000+. WTF and UFB. I think DE is hitting it on the head...pullback then launch into low 1000's. I also think the markets crash from 1000+ to 675 by Thanksgiving break, the ole' double-bottom things to suck more suckers in for 3/3/5 in the New Year. Happy it will be for us. Not them.

  14. dan
    sorry if this sounds like a naive question. on bkx are we on a major wave 5 down, no matter whether spx is in wave down or not?
    am i correct?

  15. Dan can you tell me should I go long in the market now........hehehehe...i luv it....WWWWEEEEEEEE....the greatest illusion ever created.......gotta take your hats off the the Boyz.....they are doin the impossible resurrecting the dead.......hehehhe......but that lil ol LAW of NATURE ......iz waitin...and it is hungry

  16. I've just read 4 broker/bank "expert analyst" newsletters (BoA, Wells and two others?). This is a new bull market, the low is in as of March, we've broken the only visible trend lines and there's nothing but blue sky, credit markets are stable, deflation is relegated to a remote possibility...... You must be long or be wrong.

    I've read several times this week on different blogs people complaining that they were informed by their brokers that the broker was unable to borrow underlying stock and the postion had to be be closer or it would be force liquidated. Hmmmm, a position that was already open had to be force liquidated?

    Looks like to me, there's a campaign to encourage retail buying....or distribution. And with the greed of the retail guy to get all his losses back, it's probably working.

    About those trend line breaks that the newsletters were touting one was the SPX trendline from March 2008. Granted it is broken, but they sure didn't mention the 20 and 40 trend line which is immediate and, I'd submit, far stronger resistance that was broken to the downside only 8 months ago.

    And NDX, most who know me know my opinion on that. The 2000-07 trendline held QQQQs/NDX in check for 7 years. It back tested 3 times in 2007 and 2008. The last test in August 2008 produced a near 50% decline in QQQQs while SPX dropped more than 50%. You’ve seen this chart before.

    Maybe next week's $250B of T auctions will go fine. Maybe the remaining $150T of derivatives will be mopped up. Maybe real GDP will be 2.6% this year with much better Q3and Q4 as the above banks forecast. Maybe markets will break the long term overhead resistance which the above banks skillfully avoid mentioning. Maybe delinqencies and foreclosures will recede despite the forthcoming "pick and pay" loan carnage and the consumer will find the money to buy goods and stocks. And maybe that 20/40 year trend line in SPX and 2000-07 trend line will be broken. Then I’ll be a become a bull.

    I believe derivatives will become visible again in the next two weeks and will become crisis level in August. Just a guess. Dan's charts of the banking index might be the canary in the coldmine. I'm guessing down through about Thursday, up into August 6 full moon/lunar eclipse, then an mini panic into OPEX or slightly thereafter.

    I'm afraid I depart from Prechter's (who is my hero among all TA professionals) continued bull rally into fall and rationalize this being a w4 of one lesser degree than his w2 based upon my cycle and other work.

    Thanks again for all your fine work and commentary Dan,


  17. Linus yes I have it as a wave 5 down.

    But you have to remember, if the BKX gets crushed below march lows you've got a lot of penny stocks.

    So maybe thsi index just gets crushed and the waves become uncountable and it just won;t matter anymore.

  18. thanks dan. much appreciate your prompt and self less replies.
    i agree that bkx is in 5 or a C wave down.

  19. Theory tells us:

    The wedge pattern shares most of its characteristics with the symmetrical triangle and the flag. The wedge forms much like the triangle and signifies a sharp expected breakout in the direction of the prevailing trend. Much like the flag, however, the wedge itself forms at an inclination opposite to the direction of the trend before breaking out in the direction of the prevailing trend.

    Looking at the SPX 60 min, 6 month chart, don't you see an ascending wedge?

  20. Virginia Jim . . .

    I'm not sure if you have ever shorted stock before, but it must be LOCATED prior to the stock being borrowed in order to initiate a short sale. In other words, the seller must arrange for a broker-dealer to CONFIRM that it is able to make delivery of the shorted securities. This is a legal requirement.

    When a seller has shorted stock, but has not borrowed the security or entered into a good-faith arrangement to borrow the security, or does not reasonably believe the stock can be borrowed by the settlement day, that is called NAKED SHORT SELLING.

    It sounds as though the posts that you have read on various blogs are in regards to short-sellers who were forced to liquidate out of their position because they were conducting a NAKED short, which is illegal.

  21. i am shocked, shocked to find out there is illegal trades going on here.

  22. Dan,

    I would tend to disagree.
    In fact, one can easily make a case that the 1990 Bank Debacle was worse than what we are experiencing now for a number of reasons.

    As you know, most of your large commercial banks have either repayed their TARP funds, or are in the process of repaying them. As long as they are able to continue to raise capital via secondary's in the capital markets they are not going broke any time soon.

    Perhaps the greatest significance of the TARP wasn't just the money involved, but rather the message that the Fed and Treasury sent to the financial markets . . . that they will NOT allow the Banks to FAIL.

    On a more specific note, Bank cash flows and true capital are actually in good shape. The current liquidity crisis is being caused by institutions unwilling to lend to one another, AND NOT BY A TRUE LACK OF FUNDS. This, is as opposed to a crisis where funds simply don't exist. Thus, a "fear of risk" based crisis will cure itself as interest rates adjust.

    In 1990 you had a number of issues that were present that aren't now:

    1.) Developing countries were nearly Bankrupt.

    2.) LBO's were failing.

    3.) Commodities were Deflating.

    4.) Commercial real estate was in over-supply due to a change in tax laws.

    5.) The credit derivatives market was in dire straits mainly due to the junk bond fiasco.

    6.) And lastly, THOUSANDS of banks and thrifts failed.

    Hence, the only direct parallel today is the credit market implosion. The other conditions don't exist. The only thing that would take the Banks and the banking system down would be the credit market implosion. That would require an implosion in the single-family mortgage market.

    Even if you were to allow for 50% of the sub-prime mortgages behind the credit derivatives market to fail, and the collateral value of these loans is reduced to the land only (with houses worth ZERO ), the total write down might be about $500 Billion.

    Although that would be painful, this would represent only 1% of the total debt outstanding in the US economy. It would EASILY be absorbed by the system.

    Unless I see global commodity prices DEFLATING across the board... I'm simply not willing to bet the ranch on a "Gloom and Doom" P3.

    Just one trader's opinion.

  23. Wags,

    The defaults in items such as credit cards, commercial loans, single family and commercial real estate will be much greater than the early 90's and at the end of this, over 1,000 banks will fail as there will be less demand and availability of credit throughout the financial system. I appraise commercial RE for banks (B of A, Wells, US Bank, Comerica, etc.) in CA, and I can tell you that the defaults in this asset class are just starting and values will be dropping up to 50% in many areas. 90% of my work is preforclosures and I cannot tell you how ugly it is with declining rents, higher vacanies, and higher OARs (rate of return required to attact an investor). SFR values in my area have dropped 66% from the highs as our median home price has gone from $395K to $135K. We are below the cost of construction on SFR and many parts of the country are still correcting and will see additional declines in value of 10% to 25%. Any short, we have a long way to go in the deleveraging process in all asset classes including commodities, credit is still contracting, and the banks are in far worse shape right now since the great depression. Suspending mark to market was just an effort to kick the can down the road, but judgement day will be in 2010 as the banks will be forced to address their non performing assets.

  24. Wag, re: "That they will NOT allow the Banks to FAIL."

    Who will keep the US treasury from failing?

  25. Shonek,

    I live in the San Francisco Bay Area and the volume of transactions has dramatically increased in the last 4 months. This tells me that the market place is working its way through inventory; which is quite bullish.

    Sure, there are places like Stockton, Tracy, Merced and other places in the San Joaquin Valley that are the foreclosure "capitals" of the world. ( I believe that 1 in 27 homes were in foreclosure in Stockton back in 2007 ). And I am also quite aware that the bulk of "resets" won't hit until next year.

    That having been said, the Banks are in far better shape to weather this storm than they were 6-months ago. Don't get me wrong, it will take some time before all of the housing inventory gets cleared out, and there will no doubt be further delinquencies. But as a TRADER, I'm not going to be betting the "Ranch" on the banking system, alone . . . Nor will I try and play "pick the top" by randomly putting on shorts just because I read bearish comments on someone's blog.

    Had you done that back in March, you would have gotten your head handed to you! Again, I would need to see global COMMODITY DEFLATION in order to jump on the "banking system is failing" bandwagon. Thus far, I don't see any across the board COMMODITY DEFLATION.

    At the end of the day, us traders must look to nothing other than PRICE in order to confirm any argument ( be it bullish or bearish ). Right now, PRICE continues to confirm an uptrend.

    Perhaps it might be valuable to post some charts of various commodities, as well as cyclical stocks like CAT, BTU, POT, SLB, FCX, and X.

  26. In very simple terms. The biggest bubble in the last 100 years should be followed by the biggest crash in the last 100 years. The financial crisis we just experienced is unfortunately what sub prime was to the financial crisis itself. Meaning, there is a lot of wrongs in the system that have yet to be adjusted. The most obvious one is the US dollar, the whole dollar system is flawed, a huge ponzi scheme that has not collapsed yet. But when it does, we will really see s..t hit the fan.

    I come from a country where our money was devalued from 4 to 1 in relation to the dollar to over 7000 to 1. This recession is like Disneyland compared to what I've seen.

  27. EWT,

    Care to let us all know what country you're in and what characteristics of the economy are so similar to the United States and how you think they are genuinely applicable to the USA?

  28. Wags - re banks. With respect I guess I take exception to your previous comment on banks and tarp. Many of them were investment institutions that converted to bank status to take advantage of tarp. The failure rate of banks is will pretty high though admittedly not thousands (yet?). Many tarp "banks" are back making money because of their investment arms. Real banks do not have that ability.

  29. homerrulesall - As Dan pointed out in his commentary, only 64 banks have "closed" so far this year. This is a FAR CRY from the 1600 banks insured by the FDIC that were closed between 1980-1994. Obviously, it's still early in the ballgame but I thought that I would highlight my point with actual data.

    I'm not so sure that I embrace your last point about "real banks do not have the ability" to make money because they lack an investment arm. Wells Fargo posted a RECORD Q-1 profit of $3 Billion dollars even after "digsting" Wachovia and its huge portfolio of mortgages from their acquisition of Golden West Financial. If there is any kind of "bellweather" Bank for the mortgage crisis, I would suggest that Wells Fargo and their exposure in California, Arizona, etc. is certainly one that should be under a TON or pressure, but management has been navigating the Bank through these treacherous waters pretty well with making aggressive write-downs on the Golden West portfolio from the outset of the acquisition, not too mention setting aside another $5 billion in loan loss reserves in Q-2 as well. US Bancorp also comes to mind, with net revenue in Q-2 hitting $4.2 Billion, a quarterly record.

    I would also suggest that there are a whole host of Regional Banks that are performing fairly well too, and interestingly enough many of them are in California. CVB Financial, Westamerica Bancorp, and City National come to mind.

  30. yes fewer banks have failed today(so far) than in the S&L crisis but the big differnce is the size of the intitutions
    go to the FDIC site under "failures and assistance" and you can run your own reports

  31. I think that it is also constructive here to be a bit more specific in regards to just what "is" the BKX Bank Index.

    There are 24 stocks that make up the BKX, and Keefe Bruyette & Woods applies a "float-adjusted modified capitalization-weighted" methodology to creating the index.

    Under such a methodology, the index committee at KBW will evaluate the components' currrent percentage weights on a quarterly basis - - - obviously taking into consideration scheduled weight adjustments and rebalancing due to stock repurchases, secondary offerings or other corporate actions, mergers and index composition changes.

    In other words, this index is most dynamic AND weighted. I thought that it would be important to mention this.

    Currently, this large cap bank index shows the following Top 10 weightings:

    1.) Bank of America 8.66%
    2.) JP Morgan Chase 8.52%
    3.) Wells Fargo 7.61%
    4.) US Bancorp 7.44%
    5.) Fifth Third Bancorp 4.96%
    6.) Capital One Financial 4.76%
    7.) M&T Bank Corporation 4.58%
    8.) Northern Trust 4.58%
    9.) BB&T 4.29%
    10.) State Street 4.22%

  32. One more point:

    Not all banks are created equal, and that holds true for the Regional Banks as well. Some have more residential construction exposure than others given that business is much more localized and "relationship-based".

    It is interesting to note that in the BKX Index above, US Bancorp, Fifth Third Bancorp, and M&T have less than 1% of their total assets in residential construction assets. BB&T leads the list in this category at 3.18% on assets of $143 Billion.

    Again, I think that it's important to break down various sectors and be cognizant that not all BANKS are created equal. They do have different portfolio mixes as well as management teams.

  33. Wags,
    Many points you make about commodities leading the rally are well taken, but if you see where the index was when SPX hit the 950 level in June, the recent high on the index still lags the SPX. This divergence in Price is worrisome to me. Also, crude is still below where we were when we hit our intermediate high in June. Finally, the only sector that has continued to lead the rally, making new highs is the technology sector, specifically the semis. I am not sure if there is much fuel left in that sector to drive since valuations are now hitting my multi-year sell signals. Overall, unless I see some sector take over the charge I am not sure whether their is a significant rally left to speak off.

  34. Preetinder,

    And I would not be surprised if we see a sharp "pullback" occur at some point over the short-term here which would be labeled a (B) wave.

    But because the A/D line CONTINUES to confirm the breadth of this advance ( NOTE: even Friday's paltry 24 point gain on the Dow and 3 point gain in the SPX lead to Advancers over Decliners by a 61% to 36% margin ), I'm not inclined to bet the "ranch" on P3 starting up anytime soon.

    This Bull move up off the 869 level was not just a "fluff" rally lead by one single stock sector and on crummy breadth figures. The breadth has been most impressive, and so has the overall sector ROTATION. That to me, has always been reflective of an advance that carries a lot of power.

  35. wags - your points are valid, not sure I understand the "real data" comment. I believe my point was if you look to GS, MS etc. as an example of a "bank" that would be true, yet entirely misleading.

    Here's some interesting stuff from last year: