Short Any Reflex Rally, It is Déjà vu All Over Again
Last week - déjà vu all over again.
The dollar was rising, so the market fell.
China is pulling back on stimulus, so the market fell.
Obama is going to tax the banks, so the market fell.
Obama is going to regulate the banks more than expected, so the market fell.
Ben Bernanke is not going to get confirmed, so the market fell.
Corporate profits are great but forecasts for 2010 are weak, so the market fell.
Unemployment claims rose unexpectedly, so the market fell.
Housing numbers were worse than expected, so the market fell.
The VIX was very low compared to the last two years, a sign of complacency, and so the market fell. And of course the VIX popped up.
The market breached the key support level of 11278/1128 on the S+P 500, so the market fell.
And, this weekend, everyone took a breath, and as I write this, S+P 500 futures are up more than 16 points or 1.5% in pre-market trading. Is this as reflex rally?
Yes - maybe - who cares? What is important is last week was a continuation of a trend that began in the fall of 2007 - the market responding to the banks or the federal governments and the Fed's actions concerning the banks. Around Halloween of 2007 Meredith Whitney spoke (I was, fortunately, sitting next to her at the time, you cannot imagine what you can learn having make up put on) and the banks began to break. Then Bear Stearns fell on St. Patrick's Day, Lehman in September and the market melted alongside this through February of 2009. Then the fake stress test results came out and the world - the Street - realized Uncle Sam and Uncle Ben would not let the banks fail and the March rally took hold. The rally faltered in late June, Ms. Whitney said the banks would earn plenty for the rest of the year - and disparaged 2010 - and the rally resumed. The banks stocks began to falter in late fall, six months before earnings were seen as potentially weak and as the Fed said they would begin withdrawing stimulus at the end of the first quarter.
Need any more proof? C'mon tell me this is not good enough? You can plow through all the data you want but step back a bit - there are two issues here. The banks themselves see potentially weaker earnings if there is no big upturn in the economy in the second half of the year. Second, the banks own words tell us new proposed federal taxes and regulations will whack profits.
Can a recovering economy counter this trend? What recovering economy? Can bank lobbyists counter the populist trend? Not this year. The double dip is already getting a head of steam - and uncertain banks earnings due to a lack of appropriate loan loss provisions means less lending to consumers and businesses and the important hybrid of the two - small businesses, the engine of job growth. And Obama has moved his campaign people back into the White House - and even many Republicans, catering to the tea party cranks on their right wing, are talking about more rather than less regulation aimed at the banks.
What does this mean for the typical investor? Nothing good despite the reflex rally taking shape this morning. The banks are going to see weak growth and flattening operating earnings - and many have not reserved enough for losses in the second half of the year. Capital One lost 12% on Friday for this very reason, the genius management team took a relatively small loan loss provision and then, in the same voice, said consumer delinquencies were likely to remain at abnormally high levels. Citigroup did the same schizophrenic earnings management routine a few days before. And with weak or uncertain earnings, combined with populist new taxes and regulations about to hit the banks, the bank stocks are going either sideways or down in 2010 and this will lead the market.
