Week Ahead 05-24-2010

on 05 24, 2010

Banks, Euro, Gold,  Oil, and China

The FDIC closed down Pinehurst Bank, Saint Paul, MN last week bringing the total this year to 73.  Our government and Federal Reserve have given the banking sector a free ride.  The FED bought over $1 Trillion of bad assets from the banks and we have no idea what price they bad for these assets.  Most likely they were paid 100% on the Dollar.  This would clearly be a bad move for the tax payer because we know that these troubled assets were trading as low as $0.20 on the Dollar.  We know the Treasury Secretary believes you need to pay 100% like he did with the AIG bailout.

I have repeatedly mentioned how the Fed and Treasury have allowed these banks profit from the interest rate curve.  They give them free money to borrow then allow them to collect a higher interest rate in the longer maturities.

I have also mentioned the failure to provide transparency of these large banking institutions because of the allowance of the mark to market rule on their Level Three assets.  If they are not forced to do it, then they will not provide it.  I honestly believe that every American should be staying away from these banks for this reason alone.  It doesn’t matter how good they are rated or their potential upside, until they come clean as to what they have on their books and what it is truly worth by marking it to the current market prices, then there is no reason to believe them.  Once the FASB 157 was revoked, it formed the bottom of the market.  The banks did not write off everything they had to and those hard to price assets are still performing poorly if not worse then one year ago.  Foreclosures are still high with new foreclosures every month.  Commercial real estate has gotten crushed and has room to fall.  This is all without interest rates spiking.  In fact interest rates have come in to historic lows.

What happens when the interest rates start to spike?  Mortgage and credit cards rates will mostly spike.  This will put more pressure on homes that are having trouble paying their mortgage.  This will increase foreclosures.  The rate spike will also reduce the amount that banks are making off of the interest rate curve.  Our government will be forced to pay higher rates on our debt.  In order to cover this increased cost, our government will have to increase taxes and cut spending.  Our country will not be able to afford the coming interest spike in any way.  Our stock market will feel the most pain.  Investors will gladly take higher interest rate yields over being in a risk stock market.


The Euro/USD is currently resting on support.  This means that the Euro has fallen and the Dollar increased over the past few weeks because of the financial fallout from the bailout last of Greece and potential need to bailout other countries.  This relationship tends to push the Oil Price around.  As the Dollar gets stronger, the cost of Oil goes down.  As the Dollar became weak we saw a lot of countries demanding to switch the payment method out of Dollars into something stable.


Even though BP is killing the entire Gulf and usually leaks cause supply concerns,  it is the Dollar relationships that is driving the Oil Price.  If the Euro rallies, then Oil will rally as well.


All commodities have fallen off with the strength in the Dollar.  Gold and Silver have followed with all commodities but has shown hidden strength.  This is most likely because Gold/Silver are not just a commodity but also a reserve currency of the world.  As the world produces more fiat currencies investors are flocking to an asset that will maintain it’s value as all currencies decrease in their purchase power.  It is not likely that the Euro will fail in the short term, but if one of the countries defaults then most likely the Euro will lose even more ground against the Dollar.  In these troubled times traders and investors are looking for stability to out last the financial crisis storm.

If we can get any stability out of the Euro Zone, then we should see a nice pop in the broad market, but until then let’s hope we can remain in consolidation above 10k.

China -HSI

China’s Broad market is off from its highs is April and resting on key support levels from February.  If China continues to fall, then the rest of the world may follow along.

I hope the market can hold the support levels on multiple fronts.  I think some of the Euro fears should subside and we can get back to bullish shell game that we were used to.  If support levels are broken then we could be in for some ugliness.

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