by Addison Wiggin & Ian Mathias
- Financial rumors lead stocks down… Dan Amoss with the harsh truth on the state of American banking
- Famous investor, government bigwig sound alarm for commercial real estate
- Byron King with a cautionary note… watch your energy investments
- Popular ETF/ETNs in jeopardy… which famous one just met a controversial end
- Alan Knuckman on why the world needs more commodity speculation, not less
It all started with a rumor. A bank was to fail this week — a big one. Hit the bid.
We’re hearing plenty of grumbling now — that stocks “are no longer trading on fundamentals.” If they were, yesterday’s positive manufacturing news would have sent stocks through the roof… those damn short sellers and their “bear raids” are at it again. But is it possible that (gasp!) the fundamentals for banks are still lousy? The SPDR KBW Bank ETF is up 137% from its March low… has the banking sector really gotten 137% better?
“These bulls are misdiagnosing the situation, and here’s the main reason,” writes Dan Amoss, our resident short seller and de facto banking analyst. “The banking system has no experience managing through the current “negative home equity” environment. This is an environment in which mortgage rates are already about as low as they can get and consumer balance sheets are as stressed as ever. Due to the nonrecourse nature of mortgages, most borrowers have no financial incentive to keep paying. Many are choosing to mail the keys back to the lender.
“This problem will cap the upside of bank stocks for years to come, and this sector will offer lots of short selling opportunities.
“The next move in the financial stocks will be down and regional banks and thrifts will lead this move. Most banks are reluctant to book the provision expenses necessary to maintain loss reserves, because this cuts into net income. But delaying recognition doesn’t mean they’ll go away; delay just means that losses in the future could be bigger and exacerbate the trend toward tighter credit. The market for bank stocks is not discounting this development right now, but it will over time. None of these smaller institutions are ‘too big to fail,’ so many will be resolved by the FDIC, and acquired or liquidated.”
“I think there will be at least 500 more banks fail between now and the end of next year,” said legendary distressed investor Wilbur Ross this week. Ross, like Dan Amoss, said he’s particularly worried about regional banks, which will be hit hardest by a “commercial real estate time bomb.”
Commercial real estate is a “looming problem” for bank balance sheets, FDIC chairwoman Sheila Bair admitted yesterday. While she would not wager a guess as bold as Amoss’ or Ross’, Ms. Bair did hint that losses on commercial real estate loans will be the driver for bank failures this year and next.
Mortgage applications fell 2.2% last week, even though mortgage rates fell 9 basis points. Demand for purchase and refinance loans are down, says the Mortgage Bankers Association, despite the fact that the average 30-year fixed went for 5.15% last week — down a full 124 bps from this time last year.
Perhaps that’s because people can’t find any work these days: The private sector shed another 298,000 jobs in August, ADP guesstimated today. That’s about 86,000 more than Wall Street expected.
Of course, ADP’s employment number is notoriously crummy at predicting Friday’s government jobs report, which is notoriously skewed. But you get the idea — the job scene isn’t getting any prettier.
Already weary from yesterday’s sell-off, that ADP jobs number put the stock market in the red again today. As we write, the S&P is just below breakeven.
Renewed market pessimism has put the hurt on crude oil. The light, sweet stuff got a nice pop early yesterday (it rose up to $71) after the ISM manufacturing data. But since then, oil’s been a victim of a rising dollar and falling economic expectations. As we write, the front-month contract is at $67 a barrel.
“I want to caution you on something,” says Byron King. “Lately, we’ve seen a solid correlation between the rising price of energy and related stocks. The better the economy looks, the more energy strengthens and the better things seem to get for energy plays. In August, the rising tide of oil prices lifted the share price boats for oil and oil service companies. That’s good, right?
“Obviously, investors look at rising energy prices and believe that higher earnings will eventually follow in the energy patch. That’s the idea. And I too am very bullish on energy, for a lot of reasons. But my view tends to be to the far horizon.
“In the short term — the rest of 2009 — we could still see severe swings in energy prices, especially related to general economic conditions. If the broad economy starts to slip into stagnation, or if it retreats in an economic swoon, the stock market party could be over in a New York minute.
“If that happens, you should also expect to see lower energy and energy share prices. That’s my cautionary caveat.”
Byron has his readers beefing up on their precious metals holdings, including silver, which he thinks “should rocket even faster than gold over the next 12-24 months.” Find out his favorite silver plays here.
Commodity speculators take heed: The popular crude oil exchange-traded note DXO is kicking the bucket — quickly and controversially — and other similar securities might follow suit.
Deutsche Bank announced late yesterday that they were pulling the plug on the PowerShares DB Crude Oil Double Long ETN (better known as DXO). Most ETFs and ETNs die out because they can’t attract enough investors. DXO seems to have suffered the opposite fate.
In the new clampdown on commodity speculators, it’s no huge surprise to see the world’s most popular double-long, leveraged ETN fold suddenly. Deutsche Bank didn’t specifically claim that the Commodity Futures Trading Commission put the kibosh on the DXO, but their press release did cite a “regulatory event” as the principal reason for the closure.
Set to close on Sept. 9, DXO is now hemorrhaging. We’re not sure which is worse for share prices: its imminent closure or that it’s double leveraged a commodity that’s currently plummeting.
Deutsche Bank has other popular commodity trading vehicles, like DBA (agriculture) and DBC (general commodities), that could suffer a similar fate. Both of those funds rely on a position limit exemption, which the CFTC revoked last month. Caveat emptor.
“Anytime the government intervenes like this in the financial markets, they destroy efficiency,” says Resource Trader Alert’s Alan Knuckman. “The action by the CFTC to limit position sizes will only make the problem worse by decreasing liquidity. Markets need more speculators — not less — to lessen the impact by any one entity. For example, the elimination of short selling in the financial stocks in the fall of 2008 caused more damage by dragging out the inevitable for companies that made disastrously poor decisions.
“The CFTC will force trading to move to the over the counter market, which lacks transparency, or to foreign exchanges. Volume and open interest could decline here in the United States and make transacting business more difficult and costly in the future. The present tight bid/ask spreads ensure smooth market entries and exits for all. Without the ability to execute a solid trading plan efficiently, the risks increase for all participants.
“With the current and effective monitoring rules, we know exactly who and how players are positioned. Under the proposed political pandering, that data will disappear from the public eye.”
As you’d expect, the dollar is yet again the big winner of this renewed market malaise. Just like this time last year, it’s a race out of stocks and into “safe” assets like cash and U.S. Treasuries. As we write, the dollar index is up almost a point from yesterday’s low, to 78.7.
But unlike the panic of late 2008, gold is rising too. The spot price shot up $15 at the New York open, to $972 an ounce.
“Will we suffer the same fate as those in 1929?” A reader asks, offering his perspective on our recent debate. “Yes, and more!”
“Everything we have today is bigger, faster, more pumped up by the media and — the most important thing — far more integrated on a global scale than the 1930s. The 1930s Depression spread its tentacles around the globe, but it didn’t envelope the globe, which it will this time. For example, how many Chinese people lost money in the 1929 crash? A handful, probably — this time, it will be millions…
“We also have all the amazing trading vehicles now available to ordinary investors/traders that allow them to make money from a declining market, like inverse ETFs. This will be a self-fulfilling prophecy.
“But above all, the likes of Goldman Sachs can make trillions in a stock market slump, which is why it is virtually guaranteed. Goldman Sachs et al. are positively rubbing their hands at the prospect of a major crash/slump — which is why it will happen.”
Thanks for reading,
Ian Mathias
The 5 Min. Forecast
P.S. What’s your investing plan for these uncertain times? Among other things, it would seem like a good idea to hold stocks in the most essential businesses… food, water, etc. That’s one reason Chris Mayer just put together what he calls the “Primeval Portfolio” — a collection of stocks that should suffer only if people around the world stop eating, drinking and consuming energy. He just added the final picks to the portfolio this week… be among the first to check it out by clicking here.