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Bank Stress Test: The Cheat Sheet

Banks don't want to borrow from the TARP anymore. Some of them would want to pay back their loans in order to avoid government control.

Problem is, the government don't want them to pay back the loans.

Why? Because the government will be left holding the bag. The government must have borrowed the $700B TARP from the likes of China and will be paying annual interest rates on those loans.

Stress testing the banks might force them to borrow more from the TARP and thus the government can have their 5% annual interest from most if not all of the $700B TARP allotment. But the government will have to give assurances they will not use command and control over the banks.

The more the government gets it teeth sunk into the banking industry, the more chances the banks will not fail in the furture since the government can always legislate new "projects" or initiative to help out the banks in particular and the economy in general. Meaning, the government has the power to make the banks profitable in the future and will not hesitate to use that power in order to protect it's own $700B investment. Since the taxpayers money is on the hook, the public will be more hesitant to oppose of new legislations that will benefit the banks in particular and the economy in general even if such legislation can potentially adversely affect the US consumers.

Since most of the $700B TARP has been deployed into the mega-banks who has more exposure all over the world, it would be beneficial for the banks if the government will pass legislation toward further easing of trades specially to that of the developing countries.

The developing countries will still need lots of capital for their basic infrastructure projects such as electrification, water supply systems, roads, etc. - specially the smaller ones in order for them to sustain their industrialization efforts of the last 2 decades.

They are going to need the assistance of the mega-banks such as Citigroup, BAC, JPM, and WFC who are among the most liquid banks in the world and are therefore in the best possible position to provide financing to the developing countries once this global economic downturn has turned around.

China is the first one to make a credible turn-around since Oct 2008. Most other developing countries has been making substantial gains since Oct 2008 while the US and Europe had been going downstream until March 2009.

There is a big world out there. The United States local market may have shrunked but the consumer markets in China, India, Brazil, Russia, Indonesia, Thailand, etc. are still a vast untapped markets the US can cultivate in the decades ahead.

The US and it's mega-banks have vast $trillions of liquidity, albeit borrowed from the likes of China, at very low interest rates.

Those trillions of dollars cannot be deployed in the United States since the US is already a well developed country and it's own consumers have already learned the lessons of how bad things can go if they spend beyond their means - meaning, no need for multi-billion infra-structure projects and less consumerism in the US and thus much less new companies (who will need financing from the banks) setting up in the US.

Thus, the mega-banks $trillions of cash reserves cannot be deployed in the US but rather most of them should be used as assistance loans to the developing countries.

This will be a good alternative on how the US can generated "export" income while the US is not in a viable position to gain substantial market shares in the developing countries through the "traditional" export earning industries such as agriculture, mining, manufacturing, and technology.

The US is in the most viable position in garnering a substantial portion of the profit from the global marketplace by Financing the industrialization projects of the developing countries rather than try to fight teeth to toe in the highly competitive consumer markets of China, India, Brazil, Russia, Indonesia, etc. where the profit margins on consumer products are absurbly tiny as compared to that being enjoyed by US companies from the US consumers.

For example, a retailer in the US can easily make 30% gross profit margin while in Asia a 10% gross profit margin is already acceptable if not desirable. They achieve more profit through fast turn-overs and economies of scale rather than through percentages. Add the cheap labor to the equation and the United States' manufacturing companies have very little chance to compete effectively in the consumer products markets to those produced by the developing countries.

Thus, the US has to deploy those $trillions of "borrowed" money into financing industrialization projects in the developing countries.

Borrow at low interest rates from cash rich countries such as China and lend the money to cash-strapped but viable developing countries at much higher interest rates - that way the US can use it's global leadership and credibility for maximum profit in the field where it commands the most - the banking and finance/insurance sectors.

There are only 2 sectors by which the US has commanding lead in the global marketplace:

- Military hardware/software, and

- Banking and Finance/Insurance

Thus the government cannot afford to lose the banking/finance sector to the "western world's" CDO/CDS crisis.

Develop new means and ways later on in order to become competitive again in manufacturing and/or technology as we try to solve this unemployment problem primarily caused by the stock markets meltdown and the crunchdown in consumer spending.

Rating the Top 12 U.S. Banks - From Hidden Gems to Zombies

Great for investors with 5 to 10 years timeline.

Lets see how this can pan out: I expect the next bear market bounce to start late March or early April 2009 and will last thru Sept 2009 with Dow Jones being able to regain the 9,000 to 10,000 range before the final capitulation sell-off begins. Capitulation sell-off is unpredictable and may extend up to April 2010 with Dow Jones reaching 700 to 1,000 range in the worst case scenario. Conservative estimate is 6,000 to 6,500 target range by Nov/Dec 2009. We are dealing with an Expanding Flat pattern on the 100 year chart of Dow Jones. It is expanding, so the C wave is a lot more volatile than the A wave, the upside is that the C wave is a lot more predictable pattern than the A wave only that the extent of the final run down is extremely hard to know until a viable reversal bounce starts registering on the weekly chart. 2001 to 2003 tech meltdown is the A wave of an A-B-C pattern. The bear market rally from 2003 to 2007 is the B wave. We are now witnessing the predictable but panic driven volatile C wave.

Citigroup = if it can survive the next run down in March 2009, it could go up to $10 by Sept 2009 for a meager retrace of 38.2% of its last sell-off from Sept 2008 or less than 15% retrace of the total sell-off from Dec2006. Trading strategy is to buy the next dip to possibly $2.10 if very lucky otherwise start buying at these levels and sell half at $5 conservatively and $8 with trepidation and $10 for the heroic. Hold the other half as investments just in case C survives the final capitulation sell-off of Sept to Dec 2009 and be able to regain it former $60 price in 5 to 15 years. No loss of capital unless it goes BK or nationalized before April 2009.

BAC = i dont know if the last low of $3.77 will still be broken. For now it is trying to form an inverted Head and Shoulders pattern on the daily chart with potential target of $10.89 initial run if the iHnS becomes successfull. On the weekly chart, potential resistances are at $13.50 to $17.40 assuming $3.77 holds and the iHnS succeeds. Strategy is to buy at today's low or tomorrows' early dip. Sell half in Sept2009 and hold half as investment same as C.

JPM = untradable; no definitive pattern to hold on to. It may or may not go below $15.26 low of year 2002. But for long-term investment purposes; buying at these levels can be considered prudent. there is also a buying support at $19.69 and a buy potential in the $16.80 range just in case the Jan2009 low got broken and the 3 push down bottoming pattern finally emerged - baring extremely bad news for JPM which is not expected within the next 2 months. Investors prefer higher low bottoming process rather than the 3 pushes down pattern. If JPM can significantly rally during the Dow Jones Apr-Sept2009 bear market rally; then it may be able to survive with a higher low by Nov/Dec2009. For 20 to 30 years hold; double the last high of $73.80 and add it to the last low of Nov/Dec2009, not the last low of year 2002 as a quick and dirty estimate price. For 5 to 15 years hold starting 2010; add $73.80 to the last low of Nov/Dec2009 as a QnD target.

WFC = another incomprehensive chart pattern. With no basis to find out possible downside price target except fibonachi price extension ratios; I would rather buy this at $11.20 and $8.49 with $5.49 as the extreme low price. Same technique as JPM for finding future price runs the QnD way.

STT = Same pattern as Dow Jones on the monthly chart which is an Expanding Flat. I already bought some at $15.10; will buy some more at $21.33 to $18.22 levels for long-term hold. Price target is still $12.27 nominal but STT most likely will not be able to realize it's nominal target if it goes way above the overhead resistance of $30.37 during the next bear market rally to Sept2009.

BTT = it has a price target of $17.11 but it's highly volatile monthy chart pattern prevented me from clicking my mouse at the opportune time which is a blessing. Now waiting for $10.68 as the next opportunity or if the daily will give me a recognizable pattern within Feb/Mar2009. Maybe a hidden jem but also maybe holding hidden trash that is being reflected on the extremely volatile monthly chart. Better to deal with the devil you know than the ones you don't if you are a pure lazy investor type.

USB = still untouchable at this stage; more chart data is needed for at least 10 months before it can develop something tradable. Pure darting skills needed at this moment.

COF = i dont follow this so have no opinion. Best to buy Nov/Dec2009. The monthly chart is still forecasting lower lows. $7.44 perhaps as a nominal target. Still questionable run down; at least citigroup is already in extended run down which makes it's viability a major question after the lower price support at $12.75 had been exceeded. $2 and change are option prices for C; you don't mind buying a put option protection and losing the insurance fee, do you? Same goes with BAC.

Those are the ones I prefer to track around daily.