Why BAC Will Beat: Understanding a New Bull Market Is Not Underway

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 |  Includes: BAC, C, WFC
by: J. S. Kim

Though I’m writing this article on the Saturday preceding the Monday Bank of America (NYSE:BAC) earnings announcement, I am quite confident in stating that the chances Bank of America will not surprise and beat analysts on Monday is slim to none. I can state this without reading a single word about what the analysts are predicting in terms of earnings and without scrutinizing any pre-earnings hints from Bank of America executives. I can state this for the same reason that I knew Wells Fargo (NYSE:WFC) would surprise the market to the upside, why Goldman Sachs (NYSE:GS) would surprise the market to the upside and why I wrote just last Friday on this very blog that Citigroup (NYSE:C) would surprise to the upside before it announced its earnings.

I can say this because I know that free markets and capitalism have been dead concepts for a long time now in the United States. Though we, as Americans, would like to cling to the delusion that we are a capitalistic nation that honors free market principles, capitalism has long been dead. That’s how I know beyond a shadow of doubt that Bank of America’s earnings will beat analysts’ expectations come Monday morning.

You see, the honor of the American financial system has been in shambles for decades and has devolved to the point that it now consistently mirrors the high levels of corruption we, as Americans, typically associate with emerging markets. The very regulatory agencies that we, as investors, trust to protect us, such as the Commodities Futures Trading Commission [CFTC] and the Securities Exchange Commission [SEC], do not regulate but instead protect fraudulent activities.

During the bull markets of the early 1990s, if you ever tried to convince any American with a $1 million+ portfolio of investing in emerging markets, the likely response would have been something similar to the following: “Russia, China, and Turkey? Are you kidding? Those countries are so corrupt you never know what you’re buying. Thanks, but no thanks. I’ll think I’ll keep my money in markets I know I can trust.” And that was that, end of discussion.

However, today, our markets have become so corrupt that they now resemble the capital markets of emerging countries where the lack of a strong regulatory environment enables very few financial oligarchs to strong-arm the system and heavily bias it in their favor to the detriment of the rest of their countrymen. What do I mean by this? Let’s take a trip down memory lane and review the major events that have led to bear-market rallies in U.S. markets in the past 18 months, and consider if there has been one not tinged with corruption and principles that stand in opposition to free markets?

There was the U.S. Federal Reserve-led bailout of Bear Stearns by JP Morgan (NYSE:JPM), an act that led even former Federal Reserve chairman Paul Volcker to criticize in response: “The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices.”

When the failure of many U.S. banking institutions to employ any type of risk-management principles subsequently created very illiquid operational capacities that threatened their ability to survive, the SEC stepped in in an unprecedented move to change laws and temporarily ban short selling of approximately 800 U.S. financial stocks. When AIG was about to collapse and default on billions of CDS (Credit Default Swaps) instruments that they held, our very own U.S. Secretary of Treasury Hank Paulson swiftly intervened and personally ensured that AIG would receive billions of dollars of handout money.

And of course, we have not even mentioned the trillions of other bailout money allocated to Citigroup, Fannie Mae, Freddie Mac, and numerous other financial behemoths nor the everyday workings of the President’s Working Group on Financial Markets to intervene and prevent free markets from taking their natural course. In every one of the above instances, which are just a few of the numerous actions that top financial executives and government executives have executed that have interfered with free-market behavior, who directly benefited from these actions? The American people or a few corrupt wealthy oligarchs?

When all of these “solutions” inevitably failed because none of them actually accomplished anything other than re-directing money out of the pockets of all Americans and into the pockets of a few corrupt men, the financial institutions resorted to more chicanery such as changing their definition of bad debt from 120 days to 180 days (a tactic employed by Wells Fargo) or merely ensuring that they could value their assets at whatever price they deemed reasonable even if markets found their valuations to be ludicrous (a tactic accomplished once the financial companies were able to convince FASB to suspend mark-to-market accounting regulations).

Thus, on Monday, we can expect Bank of America to declare earnings that beat analysts’ estimates, because most analysts, just like the regulators, are also part of this big con game. Many times analysts are “prepped” by financial companies' Public Relations employees that purposely feed them massively negative information that they know is inaccurate. Analysts then take this information like willing children and prepare reports based upon this misinformation. Consequently, when the time then comes for earnings announcements, markets have been prepped by analysts to expect negative results that were never accurate, and financial companies are able to release earnings that “surprise” the markets.

Outside of the con games that continually are played by financial institutions, here are four more reasons why this rally will end very shortly.

(1) Financial stocks have led this recent rally, but there is nothing fundamentally strong about any of the financial companies whose share prices have led the broad markets higher recently;

(2) If we look at the charts of individual financial stocks, volume has been weak on these rallies. Many financial stocks have probably rallied more on short-covering than anything else, and thus the rallies will not be sustainable;

(3) If we look at a chart of a broader U.S. market index above, such as the S&P 500, you will notice that the rally has occurred on decreasing volume and that a doji-star candle formation, often a sign of an imminent reversal, just formed Friday. Though the MACD is still clearly positive, the MACD is a lagging indicator; and

(4) Markets in the short-term often behave irrationally but long-term fundamentals drive markets in the long-term. This current rally has been fully irrational and has no legs. Look at the macroeconomic state today - record unemployment rates, a financial system still in utter disrepair, a commercial real estate market that is about to burst and so on. Nothing in the macroeconomic outlook points to this rally continuing nor being sustainable.

It would indeed be ironic if Bank of America’s earnings underperform analysts’ expectations since I’m so confident they will exceed them. However, even if I’m wrong about this, you won’t find me in any traditional stocks in any global market come this May for there are far better and less risky ways to create wealth from this ongoing monetary crisis. For the above four reasons, one would be best to heed the old investor cliché of Sell in May, Go Away.