Traderbill's Financial Markets Weblog

…that’s what happened to Tuesday’s breakout…it was as if everyone was asleep. That is not supposed to happen…if the breakout is real, that is…and it wasn’t…unless we are awfully lucky and luck seldom plays a role in investing. Like when a trading error is made: invariably it goes against you…so much for ‘bank error in your favor pass GO and collect $200.’ Monopoly is just a game…but useful for its psychological implications. Remember it was invented in the Great Depression and the streets and utilities were actual locations in Atlantic City…hence Boardwalk…and we all know how AC fared after and until gaming was introduced there…and that too long ago peaked. (Memo to files: if you have ever been to Vegas, don’t bother to make the trip…it pales in comparison and the only free drinks there are non-alcoholic as they are prohibited from serving free booze.) Where were we…

Oh, yes the failed rally. As TB said Monday’s rally made no sense when the dollar was being pummeled (and the feeble excuse for a global rally was an uptick in dubiously measured Chinese manufacturing). So yesterday, the battered dollar had a negative KEY REVERSAL (higher high, lower low and close below the prior day’s low). Overnight we had an Inside session (lower high, slightly higher low, missing the Tuesday low of 78.330 by the third decimal). This is the dollar index and it was weak against all currencies! We were saved overnight by the resignation of the fourth U.K. minister causing the Pound to slip (Bloomberg commentator just said the dollar has reversed direction…from what??? What did she have in her coffee this morning?). Watch gold today…down slightly now.

Now on to banks. Once again the government is changing the rules on TARP. To reprise: first, then-Treasury Paulson, force-fed some of the banks so we wouldn’t know which of them was bad (you had to be an idiot to not see that big Citigroup sign), saying they couldn’t pay it back for at least three years…and then adding after the fact that if they took the money (as if some had a chance), they had to adhere to salary restrictions. What no bank did refuse was the FDIC guarantees on their debt which allowed them to sell bonds at less than 4% (the interest rate on the TARP funds is 5% paid in the form of a quarterly dividend). No complaint on that part. THEN, when the CEO’s were summoned to appear before Congress they griped about it and Barney Frank said, fine we will let you pay us back…but first we need to administer stress tests. These tests were not pass/fail or graded but said how much more capital each of the 19 top financial companies had to raise…somehow. Of course, the weakest were Citi and BofA, and the best…surprise, surprise, were JPMorganChase and Goldman Sachs. Still with TB?

OK, so the banks raised capital…by issuing common stocks which would have required less IF the government in yet another ‘looney tunes’ rule said they could not count preferred stock as capital for the stress test only common…so in other words they said, get more investors so you can dilute the already weakened interests of the existing common shareholders (the principle of ‘everyone must feel the pain,’ TB surmises).. So against all odds even BofA was able to sell stock! …not enough but still some fools were buying it! Now it gets really weird: the bank stocks rallied on this…under the flawed rule of if there are buyers of the stock who cares about the dilution…even though we can expect that total earnings will be lower…much lower as more write downs emerge…we already know that they are not foreclosing on all the properties to keep their OREO’s (Other Real Estate Owned), from exploding…to the point where some homeowners are not even making payments and the banks are doing nothing about

Overnight, the government decided to ‘refine’ the rules for repayment of TARP funds. Yesterday, they reaffirmed that banks must be able to prove they can raise capital without guarantees before being allowed to repay the funds. Now stop right there! Because a slew of banks, including JPM or ‘Gip em’, were off raising more capital just to prove the point. This is sapping valuable capital from the rest of the economy (overnight Abu Dhabi investors who bought a stake in Barclays announced they sold it! In other words, it was a spec play.

Last week, Mike Santoli, writing in Barron’s made the point that selling more shares and thus creating dilution makes the stocks more vulnerable to a sell-off on bad news which could cause the stocks to fall even further as they were not in the hands of ‘buy and hold’ investors. TB saiz: this is the opposite of what happens during share buybacks which ran at a record pace for four years, causing the stock rally (particularly financials), to run much more than it should have before peaking by inflating earnings per share when the dollar earnings growth was not nearly as high a percentage. Now add to this mix sell-side analysts who kept upping the estimates based on the buybacks, and now with the economy in the tank keep underestimating earnings so that more stocks beat those ‘lowered bar’ estimates…not the number of stocks too that have just matched them! 

So what happened yesterday…to bank stocks that is? Well, some of those same analysts announced that JPM’s price had risen to where it was fairly valued nothing more…that after rising 127% from the March lows! It ‘gapped down’ and fell 4.5% yesterday, closing just 5 cents off the low. Wells Fargo also got hit (-4.1%),back to the 200 day moving average after being up 213% from the lows! Now consider if you were one of the ‘lucky’ ones that participated in the run-up wouldn’t you be seriously thinking of taking profits? Imagine some are saying that bonds were in a bubble…which is not possible since they pay interest so yes, they can be overpriced but not a bubble as they are returning interest…but this as banks face more real estate problems…we are just beginning to look at commercial real estate…and credit card problems…but not to worry.

Anyway, despite the feeble gains in broad indices, Financials were off 0.4% and the KBW Bank Stock Index fell 1.5% (for the record the worst performer yesterday was the high-flying Philly Semiconductor Index which fell 3.3%).

Everyone knows that JPM bought WaMu…now remember that Gip ‘Em was formed by a merger with Chase which in turn had merged with Comical…oops, Chemical Bank, well if there was a hole the old Chase would have stepped in it. So while the majority of mid, and small community banks have weathered the storm well, the government continues to insist bigger is better. Remember that flawed attempt to merge two ‘losers’, Citi and Wachovia, where fortunately Wells Fargo prevailed…what were they thinking? TB of course blames the ongoing link between the Feds and Citi…not to mention Goldman  

TB has an account to transfer funds to a relative in Oregon at WaMu…well two weeks ago Oregon converted to Chase while California remains WaMu. So sorry but you cannot transfer funds any longer…even via ATM…no siree…the bank has to overnight the transfer…the first one done during the conversion took days to post! So….TB went to Wells which TB has had excellent experience with on transfers…having two kids in Minnesota…they were able to open the account in California AND in Oregon in minutes and we can do transfers on line at any time. Next move is to close our BofA accounts and move them all to Wells. But…TB was telling the branch manager about the WaMu/Chase fiasco and she quietly listened…it appears that they have also had some problems converting Wachovia (someone asked TB if they were going to keep the Wachovia name on the East Coast…not so they are migrating everything to Wells). So is bigger really better? TB thinks it is not…definitely not…and it creates more systemic risk.

So not only has this big stock rally created big paper profits for hedge funds (most of which missed it by staying short too long) and mutual funds as well as holders of ETF’s, it makes it very vulnerable to bad news…especially since those forced to cover have now reloaded. The gain in index points of the movers in the major indices was pathetic and this time had several that lost a bunch of index points (see closing stock summary). This is not supposed to happen following a big key reversal. There is little or no conviction!

Someone summed it up the other day…if gold and the dollar are going in the opposite direction of stocks…you know which way you should play it! Be careful…very careful.

____________________________________________________________________

Quantatative easing is a failure…in addition, the stimulus package is bogged down by its own mass. Yesterday, Marin County California said that so far they have received just over $2 million despite over $15 million in ‘shove-ready’ projects…a pittance. Furthermore, many of those programs such as roads were already scheduled…locally TB has seen this as a major road project in his town of Orinda will now be paid for by the Feds. Is this really stimulus or merely keeping things from getting worse? You decide.

Have a terrific day…raining here for a second straight rare day in June?

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC, June 3, 2009.