The Tycoon Report

Can Bank Regulations Boost Your Investing Returns?

Sunday, January 24, 2010 | Ron Ianieri

Until last week at this time, the market was cruising -- seemingly ready to soar to some new recent highs.

Then came last week ... and what a difference a week made!

A plethora of news came to the forefront and hit the market pretty heavily. On Friday, the Dow Industrials (Symbol: INDU) closed below 10,200, which was a pretty strong support level.

Further, the Dow broke both the 20-day simple moving average (SMA) and the more-important (in my opinion) 50-day SMA.

Are You Ready for What This Week Will Hold?

The week ahead is going to be an interesting one for the market.

The decision that you have to make here is not only an intriguing one but also a difficult one.



The market, over the span of this mega-rally, has proven to be a “buy on the dips”-style market. Every time the market has had a sell-off, it has bounced back quickly and aggressively.

But that did not happen last week. The Dow traded down three days in a row from 10,725 down to 10,172. That is the first time in a very long time that the market has sold off so consistently and largely.

The question here is a simple and obvious one … is this a typical sell-off that should be bought, or is it the start of something bigger?

Your decision will dictate your actions going forward.

In making the decision, you must look at both the technical and fundamental indications in the market. (And to leverage the coming moves with the proper options strategies, which I teach in my Options GPS course.)

Man Cannot Trade on Technicals Alone

Now, before all of you technicians go crazy on me, stating that you can’t ignore the market’s pricing action and how bearish it is, I need to remind you that I, unlike most market technicians, do not base all of my decisions on the technicals alone.

We all know the arguments against using fundamental analysis, and those arguments do carry some weight.

Most technicians will tell you that there is no need for fundamental analysis because all of the fundamental information out there on a particular stock shows up in the technicals from the price action of the stock itself.

This is where the technicals are flawed.

A technician’s statement that all of the fundamental information is shown in the current price of the stock assumes that all of the current information is accurate, known by everyone at the same time, and interpreted the same by everyone. 

Assuming these three factors to be true is not only a giant leap … it is also incorrect!

The information that comes out is not always accurate. The information that comes out is not known by everyone at the same time. The information that comes out is not always interpreted the same way by everyone.

With this said, the technicals can never be 100% accurate.

What the Market is Missing

Why am I saying this? Because the current situation is based on inaccurate and somewhat-unknown information.

China slowing down, the housing market, unemployment numbers, the healthcare bill and potential inflation aside, this sell-off is about the banks! The technicals tell us that the news on the banks is negative.

The current administration is mulling over restricting the banks' ability to make money in the way they used to.  These banks -- already besieged by bad loans in mortgages, credit cards and commercial real estate -- are already having trouble making money.

If you take a look at the latest earnings of the banks, you can see that the revenues from the business end of most banks are down. In several cases, the banks would have missed their earnings estimates if it had not been for their trading profits.

Lucky for them that the market ran big in the last month of the quarter!

Proposed Reform: Too Little, Too Late?

We know that there is much uncertainty on this supposed plan of the administration. And we know that the market hates uncertainty.

But it was long understood that this day was coming.

The administration made it clear that things were going to change, and change big, in terms of the banks’ practices. I had even stated on Thanksgiving that I felt that the market would trade up into the end of the year, for no other reason than that Wall Street wanted its bonuses in a real bad way this year, as future bonuses will not be anywhere near what they would be for 2009.

The major reason I gave was that future bonuses would probably be dramatically altered by rule changes by government. This is probably why you saw so many banks rushing to pay back their TARP money in November and December of last year.

They wanted control of their last “non-restricted” bonus. They knew that government restrictions were on the horizon.

Now, I am not trying to say "I told you so," but I am trying to say that this information WAS out there.

But this information did not show up in the technicals until this week … over a month later!

Kind of Makes You Wonder What Other 'Surprises'
Will Be Revealed in the Charts in the Near Future

Maybe not everyone knew about it or maybe it was not interpreted as a serious factor. Maybe, some of the more recent details were just interpreted much more seriously now than then.

Or maybe it only showed up in the banks ... which it did … and did not, at that time, affect the overall market.

The fact that the banks were so willing to give back billions of free dollars -- dollars they had access to at a zero-percent rate and could be easily used to generate profits for the bank -- should have told us something about the seriousness of what was about to happen!

Regardless of why, the technicals lagged the fundamentals by a lot.

Now that the technicals have caught up to the fundamentals … or so it seems … the question is whether or not the technicals have come into equilibrium with the fundamentals, or whether it is overdone or even underdone!

The key here is one particular piece of the proposed restrictions.

Breaking the Banks Even Further

Now, there are still many rumors hovering around this situation, but the one that I think has the banks really concerned is the rumor that the government may prevent the banks from using federally insured deposits in trading and other non-loan-based investments.

This single potential restriction is the one that I believe to be pivotal. And, there are still some questions -- very big questions -- surrounding this whole possible factor.

This was first mentioned last week and seemed to be the brainchild of former Federal Reserve Chairman Paul Volcker. But, it does have the backing of Alan Greenspan (another past Fed chairman), which somehow is considered a good thing right now. 

He has the ear of Obama, so this restriction could go through. Further, the Obama administration is under fire and under public scrutiny for several things, including Wall Street bonuses.

By allowing the banks to pay back TARP funds and regain their freedom to give out fat bonuses to the people who initially got us into this mess, Obama has incited the wrath of the hard-working taxpayer who had to foot the bill to bail out these uncaring, greedy opportunists.

Even worse, most of the surface of the payment has not even been scratched!

You're Funding the Banks, Not Your Bank Account!

We, the taxpayer will be paying for this bailout for many years to come, and these guys want multimillion-dollar bonuses while their stocks (and shareholders) have been decimated.

So, Obama is looking to regain popularity by beating down a group, maybe even the only group, less popular than he is right now … the banks!

This restriction on the use of federally insured bank deposits not only has political backing, but also public backing. It could be a very serious blow to the banks!

The question, though, is how serious.

Some economists and analysts point to the percentage of trading profits versus the total profits of the banks, saying that it is not a considerable chunk. However, JPMorgan (Symbol: JPM) just reported earnings that beat the Street estimates but fell short on revenues.

According to the report, the estimate was beaten on the back of trading profits. If it weren't for the trading profits, JPMorgan (and others since) would have fallen short of estimates.

Banks Saving Your Money ... for Themselves

With that said, JPMorgan and others like Goldman Sachs (Symbol: GS) traded down heavily. Both, along with others, reported more losses on debt portfolios. They further stated that they were putting more money away for next quarter to cover these non-performing loans in residential and commercial real estate along with credit cards.

Seems to me that these “not very important or significant” trading profits are pretty important after all!

So, your decision on whether the market is oversold or undersold now should be partially based on the possibility of this particular restriction going through or not.

Personally, I disagree with the statement that the trading profits are not that big a deal.

The banks, according to their own earnings reports, continue to see lackluster revenues. This means that the money they are using to generate trading profits probably does not consist of all their own profits, but a good amount of federally insured consumer deposits.

If those funds are no longer available to the banks for trading, then their trading profits could drop significantly. With declining revenues and now-decreased trading profits, the banks could be in a little trouble.

Don’t forget -- they still have the mounting loan losses to contend with.

Whatever the outcome, I think that the technicals will probably not help you much in your decision-making process. This time, the technicals won’t let you know what is going to happen until it already has!





Ron Ianieri
Contributing Editor
The Tycoon Report