ARE GLOBAL BANKING STOCKS TOPPING?
No, probably not. Yesterday I seemed to pick on Chinese stocks, pointing out that they were all being crushed at once, suggesting they were being crushed by the US Dollar rally. I even showed irrefutable charts (in my mind irrefutable) showing the inverse relationships of Chinese stocks and stock indexes and the US Dollar: when the Dollar rises, Chinese stocks fall.
This idea was dismissed my some readers as a 'coincidence'. I promised to show one more Chinese Stock/US Dollar relationship to an SA writer who was singing the praises of investing in Baidu. I suggested against this idea as long as the Dollar was strong -- and the Dollar is currently strong against almost all currencies. In the chart, the US Dollar (representative, UUP) is red; Baidu is green. They topped and bottomed at the same (opposite action) time. Hard to deny this, although I admit the data window is small.
One reader promised me that the Chinese sell-off had been caused by government rumors of higher interest rates to cut off real estate speculation. He promised a 5% gain today in all the Chinese indexes. In truth, Shanghai, gained .36% but finished very weak at the end of the day; and the Hang Sang lost .36%. Not exactly a resounding rebuttal of my claim.
Is Baidu a buy? No. Look at the bottom pane and see the pattern the trends are creating: lower lows, lower highs. Bearish. In the top pane, the red line is M5DIff%, which is a momentum indicator. This indicator tends to rise above zero during rallies and fall below zero during declines. The orange line is not so fancy; it simply records when M5Diff% is above or below zero. A good rally will build a large orange 'box' on top. This signifies a strong buyer presence. A large 'box' at the bottom of the chart designates a strong seller presence. Spikes or short-lived moves up or down indicate a lack of conviction either way, or a struggle between buyers and sellers. My reading of this chart is that BIDU could go much lower. Of course, none of us KNOW. My indicators make 'predictions'. That is, the indicators in the top pane make predictions. The trend readings in the bottom pane describe current conditions and make no predictions.
We asked, in the title of this blog: Are Global Banking Stocks Topping? And I said, No, probably not. But many are 'predicting' a top. Citi Group is making new highs. How can I suggest it is near a top? Note the orange indicator predicted a top in April -- and Citi Group gave up 30% in the resulting decline. Trend are screaming out: "All clear; no top in sight!"
If we look at an earlier segment of the Citi Group chart, we will see another example when Citi looked strong, and then the price collapsed. Trends were quite positive in December 2006 when our orange warning box predicted a top. It subsequently predicted a bottom also, which is cancelled within a week. Citi fell from 550 to 300 over the next few months.
What about Blackrock? Blackrock looks good, right? Yes, it does. It is laughing at the M5Diff% indicator, which is falling, while prices rocket higher. Trends are all positive. I'm not saying sell or short BLK at this point. I'm saying watch this closely now, until the Orange Box reverts to the upside. All trends were positive last April when the Orange Box issued a warning; and BLK gave back 20% after this warning shot. No indicator is perfect. One needs to work with a palette of indicators, judging them against the other. The weakening of the M5Diff% is a warning shot.
In 2010 and 2011, our Large Orange Box indicator gave both a prediction of a bottom; and a later prediction of a top...and BLK rose from 145 to 210; and BLK then fell from 210 to 150. The trends were all positive when the Great Orange Box gave its top warning also.
So, what about the other banks? UBS, the Swiss Mafia Bank, is hanging out over a cliff, as is TD, Toronto Dominion, and BMO, Bank of Montreal.
Banco Santander (NYSE:SAN) is looking weak. Of course, the 'buy the dips' philosophy would probably be looking at this type of stock as a buy candidate. This is all quite fluid. SAN could become a buy candidate soon. Not now.
I remember reading a few years ago that Bank of America should be in every portfolio -- because, no matter what it does, the government will not let it fail. Well, it has put together a string of nice rallies, spoon-fed free money by the Fed. All the banks of the world have been receiving taxpayer money to play with, to risk; if they lose the money they will just get more from Father Christmas, Goodtime Bennie.
BAC looks like the other banks, hanging out over a ledge, but making new highs. Trends are undecided; the short-trend is patterning down. We need to watch this.
I have no love for the banking industry. They have been stealing money for decades. They have really been stealing money since Bernanke decided he would not let companies that fail fail. I think we need to new model for American banks, a model more close to the Public Utilities.
Nearly all of the weapons makers in America are also 'hanging over the cliff'. I ran a chart of NOC to give an example of this, but this seems to apply to all weapons companies, now that the spending cuts seem to be happening, meaning the 'pig spending' in Washington might cut out unnecessary programs.
I support these spending cuts. I also support higher taxes through 2019, especially on American corporations hoarding cash and buying back shares to keep stocks rising -- I see this evading legitimate tax payments by billion dollar corporations to be tantamount to treason, especially during this high-debt period, from which those corporations have benefitted. If I was in a position of power, Wall Street would be getting on its knees now, rather than singing their own praises. Clearly, I do not have such power.
MUNI Bonds are taking a beating; and this promises to exacerbate difficulties being experienced by local governments during this 'managed depression'. Note the bearish breakdown of the trend in the MUB chart below.
A stronger Dollar means weaker commodities, industrial companies, heavy industry companies. It means another leg down in the global depression -- this is the message Chinese stocks are giving us today. China is heading down. And if the world needs China to lead us out of this global depression, it is not going to happen. China has a huge debt bubble which it needs to pop, the same as the rest of us. Higher interest rates WILL pop the bubble; but then nations and governments will have to deal with the aftermath of this debt bubble popping, which will take at least one generation, perhaps more.
Heavy industry and mining stocks look horrible:
If the damage to commodity and commodity industry stocks is being caused by a stronger US Dollar, then Canada should be showing signs of this broadside. Canadian bank stocks are. What about Canda ETF's? Yes. Canada is 'hanging out over the cliff'. So is Germany and France. So is Singapore and Malaysia. I ran charts for these countries also -- but this post is getting long.
If the Dollar is the threat I'm suggesting it is, we should see massive intervention by central banks in the currency markets, to drive the Dollar down and to bid up the Euro, the Yen, the Pound, the Swiss France...every currency, in fact, but the Dollar. However, Japan, Britain, Switzerland, and the Euro countries are apparently not willing to stand by and allow only the US Dollar to depreciate, even if it means higher asset prices -- which, in truth, also means higher inflation for them. If China does not want to import America's inflation (the weaker US Dollar's inflation), then it must have the Yuan depreciate against the Dollar. That seems to be what is getting ready to happen. At least the Dollar is trying to bottom against the Yuan.
The choice seems to be simple. What does a country want less: the inflation that goes with artificially inflated asset prices, or a collapse in asset prices? Of course, the inflation that goes with artificially inflated asset prices also includes MORE DEBT with which the country must deal.
Can we live without the debt bubble? If the Dollar rises, the bubbles will burst. If the Dollar falls, the bubbles will persist, and debt will increase. I guess it's pretty clear what side I'm on.
I don't want to give the impression that I am bearish on stocks at the moment. For every stock that looks to be 'hanging out over the cliff' there are 10-15 that are scaling the mountain. But when everyone is positive, too positive perhaps, it is time to become wary.
Michael J. Clark, CGTS