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.

Copyright (C) Long Lake LLC 2010

Something's Going On

Bloomberg.com has some important facts laid in Stocks Plunge as Treasury Three-Month Bill Yields Turn Negative:

. . . the yen and the dollar strengthened, oil tumbled and yields on Treasury three-month bills turned negative for the first time since financial markets froze last year. . .

Stocks slid amid speculation the eight-month, 68 percent rally that drove the valuation of the MSCI World Index to the most expensive level in seven years already reflects forecasts for a 25 percent rebound in corporate earnings next year. . .

Rates turned negative on some bills maturing in January, according to Sarah Sobeck, a Treasury trader at primary dealer Jefferies & Co. The three-month bill rate was at 0.0051 percent, the least this year. Six-month bill rates dropped to the lowest since 1958. Treasury bills turned negative last December for the first time since the government began selling them in 1929 as investors scrambled to preserve principal and were willing to sacrifice returns in the months following the collapse of Lehman Brothers Holdings Inc.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the “systemic risk” of new asset bubbles is rising with the Fed keeping interest rates at record lows.

‘Painful Level’

“The Fed is trying to reflate the U.S. economy,” Gross wrote in his December investment outlook posted on the Newport Beach, California-based company’s Web site today. “The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks.”

The two-year note yield fell five basis points to 0.70 percent at 4:24 p.m. in New York, according to BGCantor Market Data. The 1 percent security due October 2011 rose 3/32, or 94 cents per $1,000 face amount, to 100 18/32. The yield touched 0.6759, the lowest since Dec. 19. It fell to an all-time low of 0.6044 percent on Dec. 17.


These very low rates are consistent with persistent or renewed economic weakness. Think the Japan scenario or the "Ice Age" hypothesis. Consistent with the "New normal" thinking, the article goes on to say:

Groupe Danone SA, the world’s largest yogurt maker, cut its forecast for annual sales growth. The company cited “profound” changes in consumer spending. Danone lost 4.4 percent in Paris.

These profound changes are stagnant incomes but rising taxes and gasoline prices along with diminished home values. Complex? No. The times are out of joint, and Hamlet in the White House lurches from economic stimulus in the winter to diminishing the deficit now.

Gallup.com's average elective consumer spending is down to $60/day, half of what it was in early 2008 and at lows not seen since this past winter; therefore lower than any time in 2008. Gallup's hiring/not hiring ratio has not improved one bit since December of 2008.

Meanwhile, you see money moving into Wal-Mart, McDonald's, gold and silver as safe havens. Silver as a safe haven? At a time of almost zero return on 6-month T-bills?

When something's going on and you don't know what it is, you, as with Dylan's Mr. Jones, are best advised to skeedaddle.

Copyright (C) Long Lake LLC 2009