Many Banks Will Eventually Fail

Tuesday, I started the Daily Report with this statement: “Any attempt to rally this market is hit with words of caution regarding the ill health of the Financials and the inflationary pressures caused by the energy markets.” Then I added in the Comments section: “Share prices in the broad market can be saved from massive destruction if the commodity producers (energy and basic materials) (i.e., the Yin) are sacrificed for the benefit of the Industrials, Consumers (cyclicals, staples and health), Financials, Tech, Telecom and Utilities (i.e. the Yang). So, while we may be in what is called a secular Bull market for commodities, there will be phases in the market where prices of commodities and the share prices of commodity producers are hammered.”

With plenty of rest and no alcohol the previous evening, I can focus my mind clearly on the market as soon as I wake. Apparently, Tuesday was one of those days as prices moved pretty much in line with my thinking.

Some of you agree and some disagree with my opinion that “the new reality today is that Crude Oil at about $90-$100 and Gold at $820 is required to stave a total collapse of securities prices across the board. If that’s what the authorities want, ultimately that’s what they will get. The only thing to be determined is the interim volatility, which is the extent of the fight to be put up by vested interests among the commodity producers.”

Tuesday’s action notwithstanding, there is another deep concern shared by many traders that the Financials can and will get the occasional boost from the Fed, but ultimately will have to write off so much worthless investment and replace it with so much new capital that their share prices will continue to fall, and many banks will in fact fail.

What I recommend is that today each of you set up a sample portfolio at Google Finance for every bank and broker with a market cap of say $5 billion or more. To make it easy, here’s a list:

• Allied Irish (AIB)
• Bank of America (BAC)
• Banco Bradesco (BBD)
• Banco Bilbao Vizcaya Argentaria (BBV)
• Banco de Chile (BCH)
• Barclays (BCS)
• Bank of New York (BK)
• Bank of Montreal (BMO)
• Bank of Nova Scotia (BNS)
• Citigroup (C)
• Canadian Imperial Bank of Commerce (CM)
• Credit Suisse (CS)
• Deutsche Bank (DB)
• Goldman Sachs (GS)
• HSBC (HBC)
• HDFC (HDB)
• ICICI Bank (IBN)
• Banco Itau Holding Financeira S.A. (ITU)
• JP Morgan (JPM)
• Kookmin Bank (KB)
• KeyCorp (KEY)
• Lehman (LEH)
• Lloyd (LYG)
• Merrill Lynch (MER)
• Morgan Stanley (MS)
• Mitsubishi UFJ Financial Group (MTU)
• National Bank of Greece (NBG)
• Nomura (NMR)
• PNC (PNC)
• Royal Bank of Canada (RY)
• Banco Santander Chile (SAN)
• Charles Schwab (SCHW)
• Banco Santander, S.A. (STD)
• SunTrust (STI)
• Toronto-Dominian (TD)
• Unibanco (UBB)
• UBS (UBS)
• Wachovia (WB)
• Wetspac (WBK)
• Wells Fargo (WFC)

Then watch for the earnings reports of these banks, comparing the results (and expected increase in write-downs) to their stock action in the market. Two things could happen to tell you this Bear market is going to end soon: (i) the write-downs are minimal, and (ii) share prices rally—not for one or two banks, but across the board--for several days after the corporate results for the biggest banks are released.

I'm not betting on that to happen. I think the shorts will return to the Financials pretty soon. Tuesday they were scared a bit that Professor Bernanke was up to his old tricks. A little short-covering, that's all.

Comments

[SleepyLagoon:]

For the authorities to be able to manipulate gold down to $820 it seems to me they would have to use "good" (i.e., non-depreciating) USD when massively shorting it instead of the rapidly depreciating variety they use at present. If that is wrong, please somebody explain how the authorities could achieve such a goal with the currency as it is.

2008 Jul 10 08:25 AM

[Gaucho:]

I agree that many of the banks will fail and that we are far from the bottom of this market/economy. But I fail to see how the price of Gold has any economic impact other than an alternative to fiat currencies. Perhaps an indicator of how bad inflation is?

2008 Jul 10 09:32 AM

[SleepyLagoon:]

gaucho - Bill is alluding to the authorities' desperate need to prevent gold from becoming a popular alternative to USD because the value of fiat currency rests upon the "faith and credit" of the issuer whereas gold's value is intrinsic. So, to the extent that gold's price rise reflects erosion of faith in the USD, the authorities' power is diminished along with their ability to "create" credit and manage or manipulate the financial system.

2008 Jul 10 10:11 AM

[David Roskoph:]

The Feds have one button - inflation. All they need do to curtail this mess is stay away from it. History however shows that when the only tool you have is a hammer, the world's a nail. Commodities are as out of control as our Federal Reserve. The multi-trillion dollar question is "do they get it?" If so, deflation, an unlikely hero, saves the day to restore the greenback before it's rolled and dispensed in rest rooms.

2008 Jul 10 12:33 PM

[Diyg:]

Stagflation is here. The question is, How do we get out of it? With Argentinian-type inflation or another Volker-type Federal Reserve? Or is it that simple?

2008 Jul 10 03:00 PM

[20smoney:]

case for cash: 20smoney.com/2008/07/1.../

2008 Jul 10 05:22 PM

[secmaven:]

All of the banks on this list are "too big" to fail. The failing banks will be the local and regional banks that plied their local markets with cheap credit with little thought about the future.

2008 Jul 10 08:57 PM

[viewfromnyc:]

If you are looking for shorts, i.e. banks that will be trading at $0.00 in the near future, look for high NPAs, toxic loan products, construction loans, Alt-A, low doc/no doc, neg am. The question is how to make money!

2008 Jul 12 11:03 PM

[The Rookie:]

So, before all our banks fail, what do you suggest I can do about it. Would buying foregn currency be a good option? And if so, how would I go about it?

2008 Jul 14 04:42 AM

[ksmithdc:]

What effect will failing banks have on the rest of us?

2008 Jul 14 08:25 PM

[Stone Fox C...:]

Ironic that this was writen 5 days prior to the 1st bank failure and likely the market bottom. Agree though that oil needed to fall to your levels in order to stave off a collapse. Or in reality, the weakness in the market finally hit oil. Can't really have oil going up with demand dropping. The financial markets will have to rebound before demand and oil can rebound. If ever. The market for oil has been cured by price.

2008 Aug 20 04:03 PM