Is the Financials' Business Model Broken?

There is mounting evidence to suggest that the business model for financial services firms, in particular the broker/dealers and money center banks, has been undergoing a massive transformation in recent months and according to some commentators and analysts is now "broken".

Hank Greenberg, formerly chairman of Bear Stearns, has been quoted in a news article as follows:

"There's no more Wall Street,'' Greenberg, said in an interview on Bloomberg's "Money & Politics'' television program. "That model just doesn't work because it's at the mercy of rumors.''

Recent comments from PIMCO's Bill Gross takes matters from a less emotionally charged perspective but has essentially reached a somewhat similar, if less dramatic, conclusion.

The changed circumstances for the financial sector pointed to by Bill Gross are more specific in that he claims that the days of high leverage, complex securitizations, light touch regulation from governments and lax credit rating standards are as he puts it "in our past and not in our future."

It is interesting to see that there is, from a technical analysis perspective of prospects for the sector, an echo in the chart patterns of XLF of the concerns expressed by both of these astute market commentators who are coming at the sector's future more from a high level, business "fundamentals" perspective.

One of the most compelling reasons to approach the markets with the tools of technical analysis is to uncover signs of divergences that lie beneath the surface of price behavior. Major negative and positive divergences, as revealed in such indicators as MACD and On Balance Volume for example, can also highlight the fact that the overall market or a particular sector is revealing a state of dissonance which can be a harbinger of inflection points and profitable trading.

Looking at the major stock indices such as the S&P 500 (as reflected in the SPY proxy) in recent weeks there has been growing evidence of positive divergences developing, with prices during November breaking to new multi-year lows whereas the momentum indicator such as the MACD is showing an upward slant and a positive divergence which is now manifesting itself in a decent rally.

In contrast the daily chart for the exchange traded fund for financial services, XLF, is not revealing the same kind of divergence and there is a suggestion that the rally may not have much further to run.

Overall my assessment, in very general terms, of this difference in the two charts is that a lot of the fire power has already been used up in the recent rally for the financials, and more importantly, the rally started out with less dissonance to be worked off.

While there may be more upside to come for the overall market, as reflected in the significant positive divergences for the S&P 500 chart, there is evidence on the XLF chart that overhead resistance is more formidable and that the same resolution of underlying market dissonance should not be expected.

DISCLOSURE: No position in SPY or XLF at present.

Comments

[IndyTB:]

Actually the former head of AIG is *Hank* Greenberg - who is not Alan.

2008 Dec 10 11:20 AM

[morph366:]

Thanks for that -- I got my Greenbergs muddled

2008 Dec 10 12:38 PM

[axelrod608:]

"Investment banks" are both unnecessary and unsustainable as currently constituted. They developed into their current form on Alan Greenspin's decade-long flood of cheap, easy, unlimited credit liquidity. Despite Frick and Frack's best efforts, that era is over. There simply is no more carrying capacity for more debt.

Bailing them out was just throwing good money after bad.

Give the money to small/medium local and regional banks that lend to the producers. We cannot come out of this mess without companies producing stuff as well as money.

2008 Dec 11 12:18 PM

[swaps:]

It's nice to reassured the broader market rally still has some legs.

The financial model we now see absolutely requires ever expanding inflation so borrowers have a chance to keep up on the treadmill.

But globalism and imported labor and outsourced labor is killing wage inflation.

Apparently none of the economists or money center banks understood this. The bigger picture by the elites calls for deflation in the advanced countries to help the less advanced laggards catch up so a global matrix overseen by thugs can be implemented.

Ron Paul is right - but he is forever repudiated. The Federal Reserve Bank will unfortunately outlive us all.

2008 Dec 11 02:40 PM

[carey_jim:]

Economic models don't break, they just become more or less useful or relevant.

A model is similar to a game. Rules are provided, a level playing field and referees to enforce the rules. Then someone blows a whistle or yells "play ball."

The same is true of religions and political systems.

Sometimes people get bored, find them a waste of time or find that they cause more harm than good.

If the models serve the rich and powerful they tend to stay in place even if they are not very useful or productive for the majority. Then, the only way to get rid of them is through war or revolution.

I don't think it is helpful to say, for example, that the Federal Reserve System is broken, any more than it is helpful to say the Catholic Church is broken.

They both serve the interests of some but not of others.

The real question is,

How do we decide that one model is better than another one without tying it out first?

2008 Dec 11 03:03 PM