Why The Stock And Bond Markets Are Going To Crash

The market is set to crash - first equities; later bonds - because HB&B is likely going to permit it. They are aware that the Glass-Steagall debate is on fire and about to burn them beyond recognition. They are undoubtedly livid and, judging from the charts of the past couple weeks as well as the holding action I observed this week, have probably decided to sell everything.

This week I alone pointed you to the fact that while there was no interest at all for equities in any market of the world there was a huge pumping action that was sending bank stocks soaring. Banks in Japan, China, India, Greece, France, Germany, UK, Ireland, and everywhere I looked were bouncing from +2% to +10% for several days in a row, which was strange because the market indexes in those countries were dropping. I came to the conclusion it was the pump before and during the dump. By the end of the week though, those bank stock charts were looking rather sick.

First, what is Glass-Stegall?

[Wiki] The Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corporation (FDIC) in the United States and included banking reforms, some of which were designed to control speculation. [1] Some provisions such as Regulation Q, which allowed the Federal Reserve to regulate interest rates in savings accounts, were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm-Leach-Bliley Act. [2] [3]

[1] “Frontline: The Wall Street Fix: Mr. Weill Goes to Washington: The Long Demise of Glass-Steagall”. www.pbs.org. PBS. 2003-05-08.http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html. Retrieved 2008-10-08.
[2] “The Repeal of Glass-Steagall and the Advent of Broad Banking” (PDF). http://www.occ.treas.gov/ftp/workpaper/wp2000-5.pdf.
[3] “GRAMM’S STATEMENT AT SIGNING CEREMONY FOR GRAMM-LEACH-BLILEY ACT”.http://banking.senate.gov/prel99/1112gbl.htm.
http://wapedia.mobi/en/Glass-Steagall_Act

To understand the controversy, read the following article:
“The “Glass-Steagall” debate has now caught fire.”
http://www.telegraph.co.uk/finance/comment/liamhalligan/6475009/Is-Georg…

For months, the big names of Wall Street and the City have done everything possible to douse the flames of open and honest discussion. But now, the logic of common sense burns brightly… We urgently need to re-impose the firewall - separating commercial “utility” banks safeguarded by government from lightly-regulated investment banks that would then be exposed to the full force of the market. At a stroke, our banking system would be far safer and the “too big to fail” issue solved. Needless to say, this is anathema to the “universal banks” of the City and Wall Street who rely on government cash for survival and from whom politicians, in turn, receive campaign donations and cushy banking jobs once their political careers have expired… It was at this disgraceful, corrupt consensus that Mervyn King earlier this month hurled a well-aimed grenade. In a speech of historic importance, the Bank of England governor boomed that Glass-Steagall’s removal, and the “breath-taking” scale of the bail-outs, had created the “biggest moral hazard in history”… Other important voices have since joined him. George Soros, the supremely influential financier, now agrees that there “has to be internal compartments that separate proprietary trading from commercial banking”.

“The big names of Wall Street and the City” of course refer to Humungous Bank & Broker, Dealer, Insurance, Principal, Agent, Analyst, Financial Advisor, Syndicator, Underwriter, Sales Distributor, Ad Nauseum”. I just shorten it to HB&B. I have written about this ugly conflict of interest problem for years. In the 1990’s I presented it to a forum of chair persons of Canada’s largest nine securities commissions, and they ignored me. I presented it to a panel of 15 Senators of the government of Canada in formal session of the Senate Banking committee, and they ignored me.

I have also written it in this blog since April 2004, and in the Wall Street Journal in June 2006, and many people in very high places have read it and chosen to dismiss it.

http://www.dailymarkets.com/economy/2009/10/19/a-revolt-against-the-conc…

http://online.wsj.com/public/article/SB114919299432468995-i_QZj733SC_6xd…

http://www.billcara.com/archives/2006/06/trading_shots_r.html

What these people in authority have done is a disgrace. They have ruled against common sense. They have allowed a bank to be all things financial to all people and to be self-regulated as well.

Tell me honestly; who didn’t see a financial accident in the making?

The rationale of course is that as long as equity markets can rally, all is fine. Is that not the same as thinking as long as I don’t get caught at the crime scene, I’m ok? Is that not an invitation to destroy all attempts at transparency?

What I noted in the blog and on the trading desk this week was that many buy signals from our system were quickly being hit with offers, reversing the cycle, pushing the stocks back into the Accumulation Zone. An AZ with a falling Daily RSI-7 is not particularly attractive. A stock with a falling Weekly RSI-7 as well is downright ugly.

I cannot begin to tell you how many ugly charts I am looking at. There are a couple industry groups or sub-groups that appear to be holding their own, but did you see that on Friday there was not a single Cara 100 company stock that lifted in price. That’s right: zero for 100. That followed Thursday when the broad equity market indexes were up +2%. Talk about night and day.

After hanging in suspended animation for five trading days from about Wednesday Oct 14, five of the past six have had losses. After hitting an intra-day high of 1101.36 on Oct. 21, the S&P 500 index closed Oct. 30 at 1036.19. That’s a drop of -5.92% in just over seven sessions. Friday’s loss was -2.81%.

A week ago, I noted an ominous Friday-Monday double down. Then Tuesday, Wednesday and Friday followed suit. A second in a row Friday-Monday double down would serve as a black flag to many traders; so watch Monday. HB&B either decide this weekend to give it another shot or else they have already made the decision to withdraw except for a well-timed pump and dump of their own stock to benefit their employees who management would not want holding the bag.

Bag-holders is what HB&B thinks of us. Why not? They are proprietary traders winning billions trading against our accounts, meaning that we are losing those billions, so we are in fact chump change bag holders. We had the money from our labor and improvement to land, and they had the schemes. They ended up with the money, and we got the change, but not the kind we had hoped for and voted for.

When Wells Fargo CEO John Stumpf told the House Banking Committee in a February 11, 2009 hearing, “We are Americans first and bankers second,” WFC stock closed at $17.50 that day; it’s $27.52 today, having taken a hit of -3.7% on Friday, but still up +57.3% since the man told what I call the lie of the century.

So we are back full circle. “The “Glass-Steagall” debate has now caught fire.”

I saw the train coming. A week ago in this WIR, I cautioned you:

After a spate of corporate earnings reports this week in which traders heard the word “blow-out” a record number of times where the details showed otherwise, equity prices on North American and Asia-Pacific markets finally turned south on Friday, ending the week down. The bullish traders, to say the least, are nervous… The small cap investors, the ones who usually bail first, led the Russell 2000 index to a -2.49% loss W/W.

I even went so far as to tell the story of encounters with my neighbors last weekend because I felt there was a message there:

Just because the Wall Street scriptwriters are telling you things are great doesn’t mean they are. Prices, simply, are escalating and people are excited - just like the condo owners were in Miami in 2005 after stunning price gains over 2004, which followed stunning price increases over 2003, etc. Where are they now? I said in the summer of 2005 that books would be written about that sordid affair and I held CNBC accountable. It’s happening all over again. If there was a factual basis for these price increases, I would be holding positions. Unfortunately I have to manage risk.

Last night at a party everybody was talking up the market. One fellow says he bought Citi at 94 cents and sold it a couple weeks later for 3 something, making $500,000 in his personal account, and now that he is a genius he says he absolutely knows the market is going higher. I asked him what his picks were and the answer was “All of them. Buy them all. They are all going higher, and I got a $100,000 (wager) that says I’m right.” So I asked what if he’s wrong, and he replied “In that case my $100,000 turns to $5,000… so big deal.” He was drunk in more ways than one.

Another friend who is also a construction worker and who also bought Citi down near the low dropped by yesterday to ask me what he should do with it. I was surprised he was still holding it, and mentioned his $1.00 cost base. No, he says, he paid $1.04 for 100,000 shares and was thinking of selling a week ago at $5. Now the price has been sliding, down to $4.46, he wanted my counsel. “Sell now” I said and “go to cash, and after C crashes, buy another $100,000 worth, and no matter what happens to it, you cleared a quarter million (it’s tax free in Bahamas). There will be lots of quality opportunities that are less risky.” Ok he says, he’ll do that, and then proceeds to tell me he also bought at Australian bank at the same time at 10 and its now 80. The mind boggles. I figured maybe he should be working with me or me with him. I just have a different kind of hard hat.

My mind just had a flash-back to the 1970’s when a friend who was a commodities broker was telling me he was making a killing in pork bellies. I really didn’t know back then what a pork belly was, but it wasn’t long after that this guy was no longer a commodities broker.

There are extreme cycles at times and we are going through one. The money has moved from the taxpayer’s account to Humungous Bank & Broker (HB&B) and through their books to their proprietary trading desks and those of their friends and best clients. Regrettably, that money never made it to the loan department despite the no-brainer profit set-up from the Fed. So, it went into the market with a little bit kept in reserve to pay off the script writers and talking heads. I don’t know what’s grown faster, the prices or the hype?

Nothing much changes at every extreme cycle top. People who don’t know gamble. They can’t stay out of the action. It’s in their blood. They couldn’t care less whether Caterpillar is CAT or 0228 or the stock is $40 or $60. Pick a number.

Reminds me of the time back in the late 1990’s when I was looking at buying into a proprietary trading firm and so I sat with the management and traders for a couple weeks. I soon gathered none of them had a clue about the market and for sure I knew they didn’t know how to trade when one of them told me he was trading Intel INTL. I told him he had the wrong symbol on the screen - he was actually trading 1,000 share blocks of INTL not knowing the correct symbol was INTC.

Truly, the mind boggles. When it comes to money, people go funny.

The skinny on United Tech is a little easier to comprehend. Extremely strong balance sheet is being used to ramp up the dividend and buy in the stock. The metrics always look better. No brainer. Paulson pulled that one after he became Treasury Secretary. I called it Paulson’s Folly because when he told Wall Street to do the same thing when the share prices were at their peak. When these banks, names you now know have failed, were spending over $10 billion to buy in their shares at record high prices, I asked in this blog if anybody with common sense really believed that was a good thing.

What goes around comes around.

With UTX, the financials and operating results are better than Caterpillar’s. But, there too the projected next five year annual rates of growth for sales, cash flow and earnings are a fraction of those of the past five years - unless of course you believe that every one in China was going to buy an elevator.

I don’t want to waste more of my time writing about this stuff. It’s a matter of respect. If people with money don’t understand and respect risk, then they will soon be parted from that money by very brilliant schemers.

In Saturday’s report I wrote about some indicators and tools you can use to take a measure of risk. For years now, I have been writing about others, like the RSI-7 indicator or the Cara 100 quality companies, and so on. It’s up to you whether you want to be in Vegas or the capital market.

Somehow the picture of horses being led to water and not drinking comes to mind. :-)

I also gave some advice here for those who do listen:

So, first a pull-back and then a lift, probably favoring US stocks, including many smaller cap stocks of companies with new cleantech products (alt-energy, biotech, semi-conductor, networks, water).

Mind you all of this is floating in my head right now and maybe it’s time to go for a walk on the beach. That would give me a couple hours not having to think about how nervous this market is; a market that is clearly in distribution.

Yes, a lot of money was parted this week; the S&P 500 was down -4.02%. CAT dropped -4.41%. UTX plunged -6.63%. Citigroup (C -8.30%) was hammered even worse. The market was clearly in distribution.

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