Tag Archives: Recession

Bank of America weakens

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Once again, Bank of America is teetering on falling below the “magic” price point of $5 per share. BAC has not been this low since the market bottomed in March, 2009. The stock is down a shocking 75% from its April high of 19.86, compared to the S&P being down 10% during the same period of time.

It’s known that large institutions steer clear of stocks under $5 per share, so in addition to being a psychological level, there are other implications as well. Thus, traders are keeping a very close eye on the stock, knowing that a move below $5 could spell more trouble.

The reality is that Bank of America swallowed way too much when it absorbed Countrywide and Merrill Lynch. At the time they probably thought they were getting a bargain, when in fact, the acquisition of those companies practically put them under.

To me, it seems as though BAC is going to need another life line, and it won’t be the American taxpayer; not this time. Instead, I could see a scenario where the company is absorbed by another/other financial institution(s) who pick it apart in what might ultimately be a fire sale.

If the US ends up in another recession (I stated long ago that I felt we were already in one) and the market tanks, I don’t see how BAC survives. In fact, it may be a necessary process to cleaning up the mess that started several years ago when banks loss all sensibility in mortgage lending.

BAC isn’t necessarily the only bank that could go away. Morgan Stanley doesn’t look much better, and Citigroup isn’t exactly setting the world on fire. But to me BAC looks the most vulnerable, given the baggage it’s carried for too long now.

Of course, I could be completely wrong here; maybe BAC comes out of this mess better than expected. But, in many ways it symbolizes everything that went wrong in the banking sector leading up to our near meltdown, so sacrificing itself for the good of the whole might not be so bad after all.

What’s Next?

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“Turmoil”. “Recession”. “Collapse”. “Sell-off” These are words frequently used by the media recently. Finally, companies are cutting down next quarter estimates (that is actually a good sign).

Even without the media, we can see things are not well. What bothers me really is that I still do not see real panic. It feels like 2008, a mix of hope, indifference, almost “Que sera, sera”. That may mean that there are still plenty of market participants just sitting on their hands and when a big selloff comes they will panic through a small door.

And that moment actually would be a high potential for a reversal. Don’t we see, analyzing the past market movements that the huge selloff on good volume, after prolonged market down drift, very often marks the bottom and most folks sell at the bottom?

I am trying to see if I can come up with possible patterns, currently in development, that later, after the fact would be so obvious.

One that I can see is a possible H&S on the 5 year weekly chart. LS around $122 April, 2010, H around $136.50 May 2011, with the possible neckline around $102-$105.

The LS proved itself so far serving as resistance again around $122 in September, 2011.

What is next? I can see a scenario:

  • SPY may stay in a range $100-$115 through the year of political fighting until the election of 2012
  • Next big move may be in October/November 2012

This is just my speculation. Am I going to trade it? Not directly. But definitely I will keep it in mind until it gets negated by a breakout above $124.

Any other possible patterns developing? I will keep looking.

Eva

Banks revenues in the tank

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I just read an article from CNBC titled, “US Banks Face Worst Revenue Decade Since Great Depression“.

In this article, CSLA’s Mike Mayo explains, “This is going to be the worst revenue growth year since 1938. And in fact, this decade for U.S. banks will be the worst revenue decade since the decade of the Great Depression.”

Of course, none of this should come as a big surprise to anyone, but still, when you see someone like Mike Mayo laying it on the line, it goes a long way to substantiating what many of us have believed for some time now.

And, what do I say to this? I say Karma is a bitch; yes, when you engage in practices like many of the big banks have for quite a while now, when you engage in wholesale foreclosure practices in spite of shoddy lending programs, when you choke off small businesses while hoarding cash that you’ve managed to accumulate thanks to the good graces of taxpayers, this is your reward. Too bad.

Honestly, bankers today are more despised than just about any other profession, perhaps right up there with politicians. And, why not? To this day, they have spent millions of dollars in legal fees trying to put a lid on what it should cost them because of the carnage they created because of their mortgage lending practices, instead of just coming out and admitting what they did was both illegal and immoral. And, the fact is, the only way this ends in any positive way is if the banks just finally cave in and become better citizens.

Banks provide an important function in our economic system, but when they try to avoid the inevitable by digging in their heels, they end up on the wrong side of the popularity meter.

If things weren’t so serious Bove would be a joke

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Here’s the latest take on things by banking analyst and “guru” Dick Bove of Rochdale Securities. To paraphrase, if the government continues on a path of holding banks accountable for their deplorable actions, the US will go into recession. In other words, give the banks a break.

Hold on now. Let’s take a little stroll down memory lane here.

First, banks have always had favored institution status, given that the money they take in from depositors (you and me) are backed up by the government (you and me).

Next, no one put a gun to the heads of bank executives when they happily raked in fees from bogus mortgages and collateralized mortgages sold to unsuspecting investors.

Next, the banks didn’t turn down the $700 billion in TARP funds that kept the bulk of them from going under while the average person on the street was left to fend for him/herself.

So, Bove saying that the government will be responsible for putting the US back into recession because they are forcing them to pay up for their mistakes, well, that sounds more like an analyst that made a bad bet on banks.

In fact, as I’ve stated before, Bove has been all over the map. In many ways, he represents the market, trying to find some footing, reaching for solutions that simply aren’t there, and hoping that one of his calls actually comes true.

Yes, if a few more banks go under, it’s going to likely cause a ripple effect, but at least we’ll end up weeding up the ones who shouldn’t be around anymore. Hell, the banks didn’t seem to have any problem at all foreclosing on millions of homeowners – many who should never have received loans in the first place – and upending their lives. So, perhaps it is fitting that these same banks suffer similar consequences. I promise, it won’t take long for most of us to forget about them.

If Goldman can’t get it right…

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According to Reuters, Goldman Sachs has cut its US GDP forecast…again. I say “again” because this is Goldman’s third cut since August, so basically over a 3 week period.

Now, I don’t know about you, but really, 3 times in 3 weeks? So we’re basically on a once a week forecast plan? Goldman explained that they made the change because of fresh economic data, but perhaps they realized that they blew it by being overly optimistic. Even their key Market Strategist Abby Joseph Cohen said late last week that as bad as things are we won’t be heading into another recession. Sorry Abby, but you are wrong once again, and you might want to huddle with other analysts at Goldman and get your collective acts together on where the economy is headed.

Seriously, Goldman was once the golden child of Wall Street and now has been reduced to making calls like this. It’s no wonder the stock has been in the tank; their credibility in a number of areas has been seriously compromised.

Of course, the truth is, world economies have come apart quickly and everyone is trying to get a handle on what is going on out there. But I would still expect more from a company like Goldman than to change their minds three times in three weeks. It’s really embarrassing.

The bottom line is that there is a lot of confusion and uncertainty in the market so even the pros are left to scramble. This leaves it up to the little guys like us to try to make sense of where things might be headed.

Analysts’ Weak Calls

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Just yesterday, noted analyst Meredith Whitney declared on CNBC that signs of a double dip recession have emerged. I had to chuckle at this because she, like many other analysts, likes to make calls after something has become obvious. It got me thinking about a blog I did back in June titled, “Many think recession is coming – I say it’s already here“. This blog got a lot of attention and a lot of comments.

The premise of my blog back in June was that signs of a recession had already emerged, leading me to declare the economy had already delved into a recession. Now it looks like Whitney agrees with me – just two months later!

I’m always baffled why CNBC continues to bring on analysts who make late or bad calls. It got me thinking of yet another blog back in July when I called out Moody’s Chief Economist, Mark Zandi, who was predicting that the 4th quarter of 2011 would be much stronger than expected and that non-farm payrolls would hit 200,000 by the end of 2011. Of course he back tracked big time when July’s non-farm payroll numbers showed an anemic 18,000 jobs added for the month. Did CNBC also call him out for such a woeful call? Forget it; he’s likely going to be on the panel when CNBC covers the jobs report on Friday.

I realize that no one can really predict where things are headed all the time, but when you make a really bad call, or wait, wait, wait so you can make an obvious call, how about at least admitting things didn’t work out the way you thought they would.

Wonder why the market is stuck? Blame Congress

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As hard it is to even imagine, a new Rasmussen poll shows that 6% of likely US voters think Congress is doing a good or excellent job. When I first heard that, my first reaction was, who is in that 6%?!? I mean, really…could it be any more of a circus than it is now? It also shows me why the market is stuck here; it’s looking for some leadership, and its sure not coming from the Hill.

I could see where maybe 60-70% of the population might think Congress is doing a lousy job, but 94%? That’s the type of result that says to me let’s toss everyone out and start over!

So, the market remains stuck in the mud, wondering if the debt ceiling will be lifted, if there will be a viable deficit reduction plan put in place, if the Fed will do anything else to try to buoy the economy. In the meantime, the market is bracing for Friday’s second quarter GDP, with the results being potentially significant.

For example, last quarter GDP clocked in at 1.9%; that’s pretty anemic. This quarter economists are expecting a drop to 1.7%, even weaker than the first quarter. So, if the economists are right, and we see a drop in GDP, that will then set up a discussion about a serious economic problem, knowing that a further drop in the third quarter would fit the text book definition of a recession where GDP falls for two consecutive quarters.

Interestingly, we’re in the midst of the second quarter earnings season and overall the numbers have looked pretty good. There have been a few disappointments, but so far it looks as though the earnings picture has been better than expected. Still, the market cannot make the leap to the next level, with the S&P being no higher than it was back in February of this year. So, earnings alone are apparently not enough to do the trick.

This gets me back to Congress, and having to ask the question, what are these clowns thinking? Or, aren’t they thinking? Are they that cocky and insulated from the rest of the world that they can’t see how much they are loathed? I guess that is entirely possible, and we’ll have to start working on that 6% who think they are doing a good job.

Fed just doesn’t get it

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Well, all of the talk about no chance of a QE3 went down the toilet today, when Fed Chairman Ben Bernanke told Congress that another round of stimulus is in the works. The market’s initial reaction was higher, but don’t be surprised if that all changes once investors and traders understand exactly why the Fed is looking at a round 3.

What continues to puzzle me is why the Fed thinks another bout of asset purchases is going to stimulate the economy. Rounds 1 and 2 really didn’t do all that much. I mean, as far as I can tell, unemployment hasn’t improved; the number of foreclosures in process and pending hasn’t improved; there are more homeowners underwater than ever, even with rates at historic lows; the banks haven’t reached out to small businesses; the stock market is trapped.

So, continuing down the same road with no additional creative thinking is likely to yield the same going nowhere results. I just don’t get that the Fed doesn’t get it.

Look; the primary beneficiaries of these continuous low rates are the banks, plain and simple. It allows them to continue to borrow funds from the Fed for next to nothing and invest those dollars into treasury bonds, making a nice spread. It would be one thing if the banks spread the wealth, but they aren’t.

The only true solution to getting us out of our on-going funk is to put more dollars into the hands of the taxpayers. Eliminate FICA for a decent period of time. The positive effects will overwhelm the negative effects. Consumer confidence will rise. People will spend. The economy will get some life. It’s not going to get any life from a QE3; been there, done that.

I know the Fed is trying to do what it can to stop GDP from falling two consecutive quarters, which would constitute another recession. They may be too late. Just accept that we need a different approach to the same problem. Trying something different might actually work.

Payroll Tax Needs a Vacation – New York Times

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Last week I laid out three specific solutions to help get our economy back on track. One of those solutions was to put a moratorium on the payroll (FICA) tax for the next 1-2 years as a way of getting more dollars into people’s pockets instantly that would help boost spending and the economy in general.

Well, someone must be listening, as I see that Cornell professor Robert H. Frank has a similar idea that he laid out in his Economic View column on Sunday in the New York Times. He makes a great case as to why taking this step makes sense, so I thought I would share it with all of you:

The federal budget deficit is a distraction.

It’s important, yes, and must be addressed. But by a wide margin, it’s not the nation’s most pressing economic problem. That would be the widespread and persistent joblessness that has plagued the labor market since the Great Recession began in 2008.

Almost 14 million people — 9.1 percent of the labor force — were officially counted as unemployed last month. But that’s just the tip of the iceberg. There were almost 9 million part-time workers who wanted, but couldn’t find, full-time jobs; 28 million in jobs they would have quit under normal conditions; and an additional 2.2 million who wanted work but couldn’t find any and dropped out of the labor force.

Read the full article

Enjoy!

Goldman Jumps on the Hopkins Recession Bandwagon

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A post-script to my recent Blog laying out the reasons that we are already in a recession:

Check out the article below that came out Saturday morning, just two days after my Blog: “Goldman Cuts View to 2% as Economy Weakens.”

Faced with the bruising headwinds of high unemployment, weak manufacturing and an otherwise listless economy, Goldman Sachs has slashed its forecast for gross domestic product.

Goldman Cuts GDP View to 2% as Economy WeakensThe firm cut its second-quarter GDP outlook to 2 percent from 3 percent, a stunning blow for an economy expected to be well on the path to recovery following the financial crisis of 2008 and 2009.

From a policy standpoint, Goldman said it does not expect the subpar growth to change the Federal Reserve’s plans to end quantitative easing later this month. However, Goldman economist Sven Jari Stehn acknowledged that “the deterioration in economic activity, on its own, would call for fresh monetary easing.”

They argue that things will get better later in the year. Perhaps, but remember that two consecutive quarters of lower GDP is a common definition of a recession, so it wouldn’t surprise me if we got that 1-2 punch before things turn around.

I think they even copied my graphic!

Read the whole article