A Look At Economic Fundamentals
Jay TaylorNo one knows for sure how long this correction of last fall's decline will last, which is why we still think taking profits along the way here is very wise. We think it could extend into October, but is better to miss some of the upside than to have another 50% decline. Actually, if McHugh's predictions come true, this next plunge will be substantially worse even than last fall. What I am firmly a believer in is that this is a phony rally. So far, money has been pumped into Wall Street, and toxic markets have bubbled up, not on the basis of sound, long-term economic growth, but rather on the heels of government funding and inventory rebuilding. To get a long-term recovery, you need end buyers, and I just can't see where they will come from.
One question we have to ask ourselves is this. If the economy is heading in such a positive direction, why is it that insiders-the people who know best what the future holds for their companies-are selling 30 times more stock than they are buying? And as pointed out by the Wellington letter, companies in the energy patch, like Valero Energy, Chevron, Exxon Mobile Corp., are all reporting disappointing earnings.
Quoting from the Wellington letter concerning Deutsche Bank: "Rising delinquencies among consumer and corporate borrowers are the 'next wave' of the financial crisis and may affect banks that have avoided losses so far, said the bank's CEO. He said: 'Bad loans are the next wave. Banks that have fared relatively well so far will also be affected by this.'"
The Wellington letter also quoted Dick Bove, a well known bank analyst, as saying, "fundamentals for the banking industry have not improved as yet…Bank stocks are trading on 'fumes.'"
Consistent with the remarks coming from Deutsche Bank were remarks made by Meredith Whitney, who said on Bloomberg Television that the number of bank failures would quadruple as lenders struggle with bad loans.
"There will be over 300 bank closures," Whitney said in an interview with Bloomberg Television from Jackson Hole, Wyoming. "The small-business owner on Main Street continues to see liquidity come away."
Unemployment has risen to the highest since the early 1980s, and Americans are falling behind on mortgage payments at a record pace, forcing regulators to seize 80 lenders in 2009, the most in 17 years. Ebank of Atlanta was closed today for being "critically undercapitalized," the Office of Thrift Supervision said. Colonial BancGroup Inc. was shut Aug. 14 and taken over by BB&T Corp. in the biggest failure since Washington Mutual Inc. collapsed in 2008.
The FDIC plans to ease rules to allow private-equity investors to acquire insolvent banks, the New York Times reported today, citing unidentified people briefed on the situation. The move would help reduce the number of failed banks the FDIC needs to support as their number increases, the newspaper said.
Whitney said that even though the panic of the financial crisis has passed, investors have been "overzealous" in estimating bank profits for the next few years. Analysts polled by Bloomberg project earnings for the industry will surge more than nine fold this year and 57 percent in 2010 as lenders recover from the worst crisis since the Great Depression.
"Many banks may be OK for while, but the real driver for the economy, which is consumer spending, I don't expect that to come back anytime soon," she said.
Financial companies in the Standard & Poor's 500 Index have collectively rallied 140 percent in the past five months after falling to the lowest level since 1992.
So the con men from Washington and Wall Street-the partners in this fascist regime-have, for the most part convinced most Americans to once again to buy their big lie. What is the big lie I'm talking about? It is the belief that your government and the Federal Reserve are here to help you and that they truly have your best interests at heart. Please, dear subscriber, don't buy that crap. In fact, do your very best to convince all those you love that our government is taking care of its own interests and they could care less about you. Why else did they see to it that Goldman Sachs and other big banks would continue to pay out huge bonuses to their employees? In fact, this year is the biggest bonus year yet, in spite of huge losses!!! Help those you love to understand that with rare exception (such as Congressman Paul, Dennis Kucinich) politicians are voting to ensure their re-election campaigns are funded.
A warning sign that savvy investors are taking to heart, in addition to the fact that insiders are big sellers of their shares, is the fact that levels of optimism, despite fundamentals signs of stress in the financial markets, are at extreme highs. As pointed out by Elliott Wave International, levels of optimism have now rebounded back to the period just before the crash of last autumn. Do you see why I think it may be wise to take some profits now?
On the other hand, gold sentiment is only moderately bullish, as measured by the premium investors who are willing to pay for gold and silver through the Central Fund of Canada.