Financials Will Likely Miss the First Leg of the New Bull

by: Bill Cara

[The following is excerpted from Bill Cara's Daily Report]

The banks and central banks of the world have taken extreme actions Thursday to try to arrest the massive selling and near panic in equity markets. So a reversal of fortunes is likely for today, at least.

But Wednesday, there were plunging share prices all over the world. At the close, the DJIA (-449.36 -4.06% to 10609.66), S&P 500 (-57.21 -4.71% to 1156.39), and NASDAQ Composite (-109.05 -4.94% to 2098.85) all collapsed. So too did the Toronto Composite (-2.86%) to 11877.7; but the Venture Board held the line with a gain of +0.72% to 1469.6.

Earlier in the day the Asia-Pacific and European markets were also hit by selling. All across the world, traders have walked away from financial services companies.

Before relating how bad Wednesday was for the Bulls, I will tell you that six leading central banks have agreed to pump more than $180 billion into global money markets that this week had seized up. The Fed announced it was extending currency swap arrangements with other central banks to fund the extra liquidity operations.

At about the same time, Britain’s Lloyds Bank [LLOY.L] made a US$21.7 billion deal to acquire the highly stressed HBOS [HBOS.L]. Lloyds sealed a 12.2 billion pound deal to buy HBOS, the country’s largest mortgage bank.

Immediately, there was a turn in the equity market indexes around the world, and prices started to rally. Some of this is short covering, and some of it will be the use of Other People’s Money by the financial services companies to pump the shares of stocks in their own industry; but much of the volume will be from traders who were cognizant that the equity market had been heavily sold down to value finding levels.

So, Thursday, there will be what may likely be the start of a market rally that lasts for as long as it takes the financial services industry to sort out their issues with write-downs and diminished reserves. As I reported Wednesday, I believe the equity market will split the financials from the non-financials, with the non-financials starting a new Bull market now, and the financial stocks rallying along with the rest for a time before falling again to test the sector bottom. At the end of the day, the financial sector will likely miss the first leg of the new Bull because traders know: (i) the balance sheet liabilities of banks are understated and their assets over-stated, and (ii) the central banks that have been coordinating this emergency lending must recover those funds to then restore the health of their own banks and the confidence of government legislators.

Homeowners are still beleaguered and consumers are still facing hugely inflated prices and have less purchasing means, so the financial services and consumer discretionary-spending companies will lag.

In any case, in equity markets Thursday, there were mostly losses until the central banks announced their relief plan: Australia All-Ords (-2.47% to 4651.9), Shanghai Composite (-1.72% to 1895.8), Hong Kong Hang Seng (-0.03% to 17632.5), India Sensex 30 (+0.40% to 13315.6), and Japan’s Nikkei 225 (-2.22% to 11489.3) were quite soft before the coordinated central bank action was taken.

In Europe, after setting lows (3954 for the CAC, 5818 for the DAX and 4883 for the FTSE), the equity markets stormed back. After the US markets open much stronger Thursday morning, the European markets are expected to sustain their rally.

In the US Wednesday, all sectors were crushed. Worst hit were Financials (NYSEARCA:XLF) -9.6% and Technology (NYSEARCA:XLK) -6.3%. A day ago, after the rally, the XLF had gained +7.5% and I remarked “these reversals may be short-lived”. I have been correctly forecasting this roller coaster for you every day, which itself is stressful.

Among industry groups Wednesday, all were hammered into the deep red – except one – the Goldminers: the $XAU index gained +8.6%. The opening paragraph of my commentary Wednesday saved so many of you from selling.

The losers in the XLF were the Broker-Dealers ($XBD -10.2%) and Banks ($BKX -7.7%).

Among the Cara 100, there were some big winners on a day when the broad market sank about -5.0%. The leading winners were SanDisk (SNDK) (+39.1%), Barrick Gold (NYSE:ABX) (+13.0%), Goldcorp (NYSE:GG) (+11.0%) and Silver Wheaton (NYSE:SLW).

The leading losers were: Interactive brokers (NASDAQ:IBKR) (-15.2%), Goldman Sachs (NYSE:GS) (-13.9%), PetroChina (NYSE:PTR) (-13.4%), and Linhas Areas Inteligentes (NYSE:GOL) (-13.2%). Goldman Sachs reported a -70% drop in earnings, but traders ignored the report because they do not trust the write-offs, believing instead that GS will be merged with another sad-sack bank in order to hide the losses and try to sustain what has been a pristine reputation in the industry.

All in all, there were nine Cara 100 stocks that dropped over -10% on the day, which shows that the shares of even the best quality companies can plunge at times, making it all the more important to be an active trader when markets are volatile.

Bond Yields dropped as the safe-haven trade was put on again. The 30-year US Treasury Bond ($USB) gained +0.28% to 122.89. Yields on the 30-year, 10-year and 5-year dropped to 4.081, 3.410 and 2.489 percent respectively. The yield on the 3-month Treasury Bill dropped to almost nil.

Gold prices soared in the biggest one-day gain ever, with $GOLD lifting +$70.00/oz to 850.50. Crude Oil ($WTIC) gained +5.94/bbl to 96.96. The $USD sank -1.22% to 78.19, while the Euro gained +1.24% to 143.30. The Yen, and Pound gained +1.52% and +1.79% respectively, while the Cdn Loonie lost -0.27% to 93.40.

In the futures market, prices are moving so fast, it would be silly for me to quote them. Suffice to say that Crude Oil is on its way to 100, Gold may hit 900, the DJIA futures are up about +100, the $USD is down large and the Euro well up during the early morning.

Trading will be very volatile, Thursday and Friday, which is called Quadruple Witching Day.