The Bear Grounds Players in Reality

by: Bill Cara

The oil price is at record highs. Exxon Mobil (NYSE:XOM) has cycled back up to 94.36, providing another in a continuous series of short-selling opportunities. The long-term price chart shows the upper level resistance going back to July 2007.

On signs of a break-out above $96.00, or collapse of the $USD, I’d cover shorts and await the next opportunity to put on another short trade.

One of the reasons why I am not bullish on the broad equity market is that the banks have not been transparent as to their losses and the provisions for loss ought to have been write-offs in many cases, which would have required them to seek even more replacement capital. I believe that there have been humongous losses that will soon come to light, and that will spur lawsuits of a significant number and magnitude.

Tuesday came to light one of those lawsuits between ex-Cara 100 banks Fifth Third (NASDAQ:FITB) and Citigroup (NYSE:C). There will be many more of these suits as management is pressed by shareholders to explain their losses. The lawsuits hit at the reality of the management practices within banks that the public never hears about. Makes sobering reading because these bankers are supposed to be your advisors.

Moreover, as the 2002-2007 Bull market was extended, there was vicious competition to outperform one’s peer group in the financial sector and the excesses that occurred also resulted in humongous errors in judgment by senior executives. Many situations are now being found to have been so egregious as to lead, in many cases, to criminal prosecution of big name executives.

The lesson here is that as greed prevails in a Bull market, and like price speculation becomes excessive in extended Bull markets, so too do bad management practices. A Bear market reverses the trend and once again grounds the players in reality. Prison sentences, massive fines and penalties, and lawsuits tend to happen in Bear markets, and we are just now beginning to see these hit the radar in a significant way.

The positive side to this is that during the unwinding process, market prices revert to a point where new investment at sustainable levels can find value.