BAC and Financials May Be Canaries in a Collapsing Coal Mine

Bank of America stock is currently down over 7% on a poorly-received earnings report. Citi is down half as much, and Wells Fargo is down as well. Look at the stock chart of BofA (symbol BAC) to the right. In the winter, support was found not at the 50 day simple moving average but at the lower, 200 day sma. Now, the 50 day sma (green line) has moved below the 200 day sma, and unfortunately the 50 day has been formidable resistance.

Corroborating this is the severe weakness in what I privately consider bellwether financials UMBF as well as NTRS. I consider them bellwethers as they are not involved with heavy derivatives, did not engage in government-sponsored acquisitions of failing financial institutions in 2008, and are considered to be overall relatively "clean". NTRS (Northern Trust) is of course heavily involved in trust activities and thus is not a pure bank.

The Consumer Metrics Institute (www.consumerindexes.com) shows a significant slowdown that continues to "point lower" at a later date in the slowdown than the 2008 recession/depression.

It is increasingly looking as though the Fed created money, distributed it to holders of mortgage-backed securities as well as owners of Treasuries (primary broker-dealers) and that money largely stayed within the financial system, propping up the prices of stocks and bonds. Unfortunately, on Main Street, demand for loans that met the newly-rational standards of the chastened banking community was small. People have begun paring their bloated debt levels and so the U. S. has gone Japanese for now. However, unlike Japan, the U. S. does not self-finance its own debt. Thus the duality of us being Japanecian: as with Greece, "the markets" can cause rates to soar by suddenly claiming to be shocked, shocked at the state of Federal finances.

Are T-bills truly riskless in this environment? Their equivalent in Greece did not prove to be so, and the euro-bond vigilantes have turned to Spain. Echoes of 1997-98 abound. That era proved both to be the top for the average U. S. stock (not the capitalization-weighted indexes such as the S&P 500, though) but the resulting deflation helped prevent price inflation here. Given how complicit the U. S. was in this current part of the cycle, it is easy to see things getting worse here both in the real economy and even more so in what continue to be overvalued domestic stock and bond markets.

In early 2007, the persistent relative weakness in the large-cap financials foretold the bear market and financial troubles to come. Let us hope that the recent past is not prologue.

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