Banks: Is This the Biggest Bear Squeeze in History?

Sure looks like it. I predicted exactly a week ago that 'the Freddie (FRE) and Fannie (FNM) show may be seen in hindsight as a cathartic moment setting the scene for a sharp rally in coming weeks, particularly in unloved financial stocks.'

Well, it's started with a vengeance; the financial sector was up 11% on the week, the KBW index of US banks having lost 25% of its value by the low point on Wednesday (with a massive spike in volumes screaming capitulation, see chart), only to gain 33% by Friday's close. The VIX briefly shot above 30, Gold spiked, and the Armageddon crowd hijacked CNBC, warning us to head for the hills with a crate of gold; I hope they take their own advice and stay in those caves for a while.

The last time I called a market turning point was in mid March in Crackheads in a Casino, when I stated that the economically destabilising activities of hedge funds in financial stocks would have to be reined in, and they finally have been. Oil is next in line for tougher regulation. We have now seen the two hottest momentum trades of the last few months, long oil and short financials, thrown into reverse. The key factor last week, aside from the mildly encouraging results ex Merrill's, was the new SEC naked short selling restriction on financials, and this is hugely important not only in its own right, but as a harbinger of a far more interventionist policy.

In Washington, free market ideologues and Wall Street lobbyists are no longer invited to the best dinner parties, as politicians finally realise that left to their own devices, markets tend to excess, not equilibrium. Bigger, more proactive government is now inevitable in the US under either candidate, implying structurally bigger fiscal deficits and higher bond yields (not just in the US; the UK is now deficit spending like a teenager let loose with a credit card, one reason why I'm a Sterling bear). The combination of the long overdue bursting of the energy bubble (see chart below) and the extreme oversold level in financials made this rebound inevitable.

So now where? Short term, there will be certainly be more bank failures and negative earnings surprise as the deleveraging process grinds on, but despite that backdrop gold and oil look like huge double tops, the dollar looks cheap, and a 10-15% equity bear rally has just begun (although mixed corporate results will create volatility, and I doubt we've seen the cycle bottom).

Longer term, US growth will surprise on the upside and Europe on the downside, developed markets will outperform emerging, equities will outperform bonds, and shrewd bloggers who put their money where their views are will outperform investment bank strategists who don't.

Comments

[TDavid:]

That's right, this rally got the novice investors and today they will sell in panic.

2008 Jul 21 05:39 AM

[davenerven:]

Everyone should read this and realise why shorts in financials will soon be crushed. Please do look through the site - I promise it will be worth the effort. It's about the financial establishment against Patrick Byrne.

www.deepcapture.com/

Then watch this, if your interest has been aroused.

www.deepcapturethemovi...

Then sign this please:

www.petitiononline.com...

2008 Jul 21 07:02 AM

[waldipup:]

Maybe I didn't peruse all the writings thoroughly enough ,

but didn't the FDIC just put up 10% of its reserves to deal with IndyMac?

Because the gov't. stepped in to help Fannie/Freddy , does that make their problems go away?

You can have the government print money and make all our problems go away?

Is the "upside surprise" we are to expect in the U.S. based on the drop in the oil price from the 140's to the 120's?

That new "lower level" of oil prices can now support economic growth?

Is or is not an $1800 Heat and hot water yearly bill a few years ago slated to be $7 - 8000 this winter?

How will that impact on subprimers (and others) barely solvent now?

Will that help or hurt Fan/Fre ?

(Yes , they do hold many subprime loans.

Their guidelines have been massively subverted by phony appraisals and "creative" income/credit maneuvers by "certified, licensed" brokers .

I'm not a gloom and doomer , but I'm not blind or easily placated by "mainstream" assumptions .

Rome , the ultimate power of its time , kept plodding along during its downturn -

Until it stopped plodding.

2008 Jul 21 08:37 AM

[glassbox:]

I have just signed the petition on www.petitiononline.com.... Its high time we shareholders start exerting our property rights!

2008 Jul 21 09:57 AM

[vaduz:]

it is a historic fact that over the long term - a few years - intervention by goverment brings worse results than letting the subjects, the people, decide on their own. of course criminal behavour doesnt belong to the free market and it is necessary that transperancy and free flow of information is secured.

2008 Jul 21 10:02 AM

[pavlov:]

Fed will make it illegal to sell bank stocks and have them issue mandatory rights next!!!
The free-market system is now TOAST!!!

2008 Jul 21 04:16 PM

[knot2hazy:]

Check this site, then answer my question.

www4.fdic.gov/dip/inde...

Why would the official FDIC website create a "dropdown" window if it was not planning on adding new banks?

2008 Jul 21 05:11 PM

[Calvin C.:]

Me & my watched the entire slide show & fiancee signed the petition. Very compelling stuff...

2008 Jul 22 12:24 AM

[Dan Walker:]

Number one, let me go on record that naked short selling was banned in the 30's and it served us well for 75 years. I think it should still be applied for ALL stocks and not just the ones who can continue to fund the FED's malfeasance in favor of the banking industry.

Assuming that protection is in place, short sellers are NECESSARY simply because they provide a bid in a downdraft (sub-optimal price discovery process for you liberals). You want an air pocket under a collapsing stock? That is the shortest path to zero.

2008 Jul 22 05:18 AM

[davenerven:]

There is NO EXCUSE for the shorts selling MORE THAN THE ENTIRE FLOAT of stock in EVERY CATEGORY. This is just raping the entire American investment community and it is being done by criminals and their friends in the hedge fund business and abetted by the SEC not keeping an eye on the crazy volume of FTDs. I think a law should just be passed to force every naked short to deliver after 3 days, like in Europe. Then we will have a fair market again. We need this law and we need it NOW. Screw it if it bankrupt the shorts. They deserve it.

2008 Jul 22 06:37 AM

[davenerven:]

Another site from a market professional about the subject:

megamata.com/forum/vie...

He would not advise clients to even do their IPOs in the USA. What has the SEC done to the financial markets in the US? Who is accountable? We need a guaranteed stock delivery LAW NOW.

2008 Jul 22 06:41 AM

[chistletoe:]

one or two problems with your rosie scenario:
Fannie, Freddy, and Uncle Sam are still bankrupt,
and americans still want more oil than the earth can provide.

It was a lovely correction
but we're back on the main page today.

2008 Jul 21 05:21 AM