Week of 10/2/11

Bove Turns Bullish On Banks

Last May, Dick Bove of Rochdale Securities found few friends among analysts when he suggested selling Goldman Sachs (GS), then around $140 but now $95. He was bearish before it was popular. After the recent drubbing in the market, however, he’s turned bullish.

In a research note sent to clients yesterday, Bove cited credit default swaps pricing in the complete collapse of the American banking system. Their levels indicate that US banks can’t raise capital in the open market, which isn’t true. “The American banking industry is not going to fail or be nationalized,” he wrote.

He thinks bank “stocks are representing hysteria, not reality.” From a liquidity standpoint, he finds current bank balance sheets to be “stronger than ever” even as just five major US banks hold “meaningful” exposure to the European crisis. – 10/5/11

The Oil Chart

From Greg Schnell at StockCharts, here’s a shot of West Texas Intermediate’s trend since March, click to enlarge:
WTI from March 2011 - click to enlarge

“Oil is going lower. … Long-term stops should probably locate below $70, and really long-term stops below $67.”

Here are the Fibonacci retracements:

WTI Fibonacci retracements - click to enlarge

“When we bounced off the 2009 lows, we rebounded to 38 percent, then about 50 percent and held there for almost a year. So far, we have retraced 50 percent of the rise from the 2011 highs. … A downside target if $74 does not hold would be $64 based on Fibonacci.”

Here are the Bollinger Bands and moving averages:

WTI Bollinger Bands and moving averages - click to enlarge

“The center of the BB is very important. It is almost a mood line. When below, it’s hard to get happy. This line tends to be resistance and it keeps knocking the price down. … My current bias is with the trend. Down. But rallies up to the 50 MA and the BB center would be normal.” – 10/5/11

Volatility In 2012

Kenneth Rogoff at FT: “The end of 2012 will mark a once in 20-year overlap of a presidential election in the US with a leadership transition in China. France also chooses its president in the spring of next year, Germany its chancellor later in 2013.

“The US, Europe, and China all have big decisions to take over how their economies and societies are to be shaped in the future. If existing or new leaders emerge from the upcoming elections with a clear mandate, perhaps we will see the kind of structural reform that will help growth and stability over the longer term. But if the overhang of elections exacerbates paralysis around difficult policy decisions, it will create huge potential for amplification at the worst possible time. Even under the best scenario, 2012 promises to be a year of even greater politically-induced volatility than 2011.”
– 10/5/11

Friedman On Politicians

Milton Friedman said in 1975: “I do not believe that the solution to our problem is simply to elect the right people. The important thing is to establish a political climate of opinion which will make it politically profitable for the wrong people to do the right thing. Unless it is politically profitable for the wrong people to do the right thing, the right people will not do the right thing either, or if they try, they will shortly be out of office.” – 10/5/11

Occupy Wall Street

Andrew Ross Sorkin at DealBook: “The demonstrators are seeking accountability for Wall Street and corporate America for the financial crisis and the growing economic inequality gap. And that message is a warning shot about the kind of civil unrest that may emerge — as we’ve seen in some European countries — if our economy continues to struggle. … Consider the protests a delayed reaction to the financial crisis that has now reached a fever pitch as the public’s lust for scalp has gone unfulfilled. In Chicago on Monday, one sign read: ‘If corporations are people, why can’t we put them in jail?'”

Daniel Indiviglio at The Atlantic thinks the movement “isn’t likely to accomplish anything” because its goals are unclear, Wall Street doesn’t care, the protesters can’t sway Congress, their timing is off because government can’t move against Wall Street when the economy is this weak or the problem would get worse for the self-proclaimed 99 percenters suffering from high unemployment, and banking is a vital institution in the US.

“All the protest really appears to stand for is a general dislike of Wall Street. But what does that mean? … Occupy Wall Street movement’s anger is directed at bankers. Here’s the problem: they really don’t care. These protesters are not Wall Street’s customers. In many cases they aren’t even their customers’ customers. Over the weekend, I saw a YouTube video of some Wall Streeters sipping champagne as they watched the protests from a balcony above. … As the banking industry remains fragile, the government isn’t likely to wallop it with new fees, taxes, or regulation just because a few thousand protesters in Lower Manhattan are making some noise. The last thing we need is another financial crisis.”

Paul Joseph Watson goes even farther at Infowars: “Despite their honest intentions, many of the Occupy Wall Street protesters are being suckered into a trap and calling for the very ‘solutions’ that are part of the financial elite’s agenda to torpedo the American middle class — higher taxes and more big government. … The protesters just don’t get it. They are calling for the government to use force to impose their ideas, all in the name of bringing down corporations who they don’t realize have completely bought off government regulators.” – 10/5/11

Off With Their Heads

Rosanne Barr, the comedian, said about corrupt bankers: “I am in favor of the return of the guillotine. I first would allow the guilty bankers to pay, you know, the ability to pay back anything over $100 million.” She would let them attend “re-education camps and if that doesn’t help, then being beheaded.”

Stephen L. Carter at The Daily Beast thinks the protesters showed up in the wrong town if they want to effect real change: “The money that once supported a less fraught lifestyle did not vanish into Wall Street, or the coffers of greedy corporations; it just vanished. The world is less wealthy than it was four years ago. Whatever short-term stimulus plans politicians may adopt, the question in the end is whether government policy over the long term will restrain or unleash the forces that created so much wealth over the past three decades. Perhaps the demonstrators should be marching on Washington.” – 10/5/11

Putting Lower Prices To Work

Tom Stevenson at The Telegraph: “The most important determinant of future investment returns is the price paid at the time of the initial investment. … If history were to repeat itself, returns of in excess of 10 percent a year for the next 10 years might be expected. … For a long-term investor, buying shares when they are as cheap as they are today stacks the odds in your favor. It doesn’t mean you’ll win, just that you are more likely to.”

Citing seasonality and central bank measures, Tom Sowanick at OmniVest expects “to see a strong Q4 rally in the midst of all the gloom.” Sam Stovall at S&P reminds that when Q3 drops 10 percent or more, Q4 is almost always positive. However, “we still believe equities will again trend lower after the traditional year-end rally. The best of the quarterly returns are likely behind us. While history shows us that the market’s performance in the coming five quarters may be good, it may not be great.” – 10/3/11

Downside Targets

Peter Brandt wrote that the H&S top of early August “is a MAJOR game changer,” that “all short-term periods of uncertainty will be resolved with a bearish outcome,” and the downside “targets remain the 2010 low followed by the 2009 low.” On the S&P 500, those were 1011 and 667 respectively, implying potential drops of 11 percent and 41 percent from Friday’s close. – 10/3/11

Normal Deleveraging Recession

This is not news to longtime readers, but it’s worth remembering that we knew from the beginning this recession would drag on because it was not caused by a normal business cycle but by deleveraging after bad debt — with both rapacious banks and stupid borrowers to blame. Morgan Housel provides a good recap of this point:

“The recession that started in 2007 was different [from others since WWII]. It was caused by an inherently unsound economy driven by debt. That dynamic changes everything, as deleveraging is like molasses in an economy’s veins. When you find yourself in a debt-driven recession, the result is always the same: a glacially slow recovery. As a McKinsey & Co. report noted, ‘Historic deleveraging episodes have been painful, on average lasting six to seven years.’ More money is going toward yesterday’s bills, which means less for today’s and tomorrow’s.

“The recovery isn’t slow because of regulation, taxes, health-care reform, or some vague ‘uncertainty’ boogeyman. It’s slow because consumers are still deleveraging. And it’s not going to get better until they’re done. … Some look at the economy’s total debt load, including federal debt, and argue that it’ll be around 2017 before things are back to normal at the rate we’re now deleveraging. Since the recession began in earnest in 2009, that would be about eight years of deleveraging. Which, coincidentally, is exactly what history shows we should expect after a debt-driven recession. – 10/3/11

Less Risk, More Return

Ben Levisohn notes that the S&P Low Volatility Index of the 100 least-volatile stocks in the S&P 500 lost just 1.1 percent since the beginning of August, compared with a 9.8-percent drop for the overall 500. “More surprising, however, is that the Low-Volatility Index has returned 80 percent during the past 10 years, compared with the S&P 500’s 42.9 percent, assuming reinvested dividends.” Interested? Try SPLV and LVOL. – 10/3/11

Occupy Wall Street

We expected civil unrest in the worsening recession, and it’s here. Chris Hedges wrote at TruthDig: “The state and corporate forces … have their metal barricades set up on every single street leading into the New York financial district, where the mandarins in Brooks Brothers suits use your money, money they stole from you, to gamble and speculate and gorge themselves while one in four children outside those barricades depend on food stamps to eat. Speculation in the 17th century was a crime. Speculators were hanged. Today they run the state and the financial markets. …

“Corporations have cemented into place a thin oligarchic class and an obsequious cadre of politicians, judges and journalists who live in their little gated Versailles while 6M Americans are thrown out of their homes, a number soon to rise to 10M, where a million people a year go bankrupt because they cannot pay their medical bills and 45,000 die from lack of proper care, where real joblessness is spiraling to over 20 percent, where the citizens spend lives toiling in debt peonage, working dead-end jobs, when they have jobs, a world devoid of hope, a world of masters and serfs. … Who the hell cares? If the stocks of ExxonMobil or the coal industry or Goldman Sachs are high, life is good. Profit. Profit. Profit. That is what they chant behind those metal barricades.” See Occupy Together. – 10/3/11

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