WEDNESDAY, AUGUST 15, 2012
PUBLISHED BY INSTITUTIONAL ADVISORS
The following is part of Pivotal Events that was
published for our subscribers August 9, 2012.
SIGNS OF THE TIMES:
“Sandy Weill, whose creation of Citigroup ushered in the era of U.S. banking conglomerates a decade before the financial crisis, said it is time to dismantle the nation’s largest lenders.”
This is Bloomberg’s July 25th article, and the Wall Street Journal had the headline: “Sandy Weill Regrets Breaking Glass”.
Weill is quoted “What we should do is go and split up investment banking from banking.”
He was instrumental in the 1998 merger of Citicorp and Travelers Group, which was the deal that required the repeal of Glass-Steagall. And, as the saying goes “The rest was history”, as Citi stock collapsed from 515 in 2007 to 9.70, repeat 9.70, in 2009. The best on the rebound was 51.50 in January 2011.
It is always fascinating to see examples of how the culture of finance changes from the habits of probity learned in the previous depression to “anything goes” in a new financial era. And, eventually, back to probity, for which Weill seems to be an agent.
It should be emphasized that in the early 1930s most in the establishment understood that the depression was caused by the financial collapse inevitable to a bubble. Since the 1950s too many academics believe that the post-1929 crash was due to the policy error of raising the discount rate from 5 percent to 6 percent in early August of that fateful year.
On the certain knowledge that the boom caused the bust, Glass-Steagall split ordinary banking from Wall Street banking. It made sense, as did the formation of the SEC with the mandate to prevent a repeat of the “Roaring Twenties”. Well, with 2007 recording most of the features of a great bubble the SEC failed on its mandate. Also, one of the promoters of the SEC Act boasted that it “would put a cop on the corner of Wall and Broad Streets”.
The Madoff fraud had a number of whistle-blowers and the SEC did not act on the biggest Pozni Scheme in history.
Glass-Steagall was thrown out in 1998 as part of another cultural change to reckless financial speculation. Now one of the key agents of change is exploring remorse and repentance.
Perhaps, the SEC will try to assume the mantle of responsibility and accountability that it was originally charged with.
Attached is a copy of our “Book Report” of September 7, 2007. The Ropespinner Conspiracy is a satire published in 1987 on the corruption of banking by “modern” concepts, otherwise known as borrowing short and lending long.
“The European Central Bank is edging toward a bond-buying program that investors say could end up printing money, echoing efforts by the Federal Reserve and other central banks to fix a credit crisis nearing its sixth year.”
– Bloomberg, August 3
The article did not include that the Bank of Japan has been similarly aggressive since around 1991. Some of this summer’s interns in the BoJ’s research department could have been born after their Great Depression began.
* * * * *
Fortunately, the “good vibes” have appeared again. Stock market action has been “choppy” and the latest rush has moved the S&P to 1407. This compares to the natural high of 1422 at the end of March and the test of that high at 1415 at the beginning of May. Unfortunately, trading breadth is deteriorating. We are watching for some ending action – seasonally and dynamically.
This has been supported by similar swings in commodities that are beginning to look tired. Other support has been provided by continued narrowing of the Ted Spread. The weekly RSI has traded from very overbought with last fall’s financial pressures to rather oversold this week. The swing is big enough to be significant.
Longer-dated corporate spreads have narrowed significantly since early July.
Since the high on July 26 the long bond has set a downtrend to 147.5. While declining with the joy of risk elsewhere, the key thing is that the top has been made.
Since the first of the month, investment grade corps (LQD) have rolled over, and the emerging market bonds (EMB) have declined a little.
The point is that long treasuries have been leading the action as lower-grade issues continued to party. Over the past week, the yield for Baa has increased from 3.54% to 3.63% as junk declined from 11.46% to 11.23%. Such divergences are typically found at important tops for the whole bond market.
And really in the party mode, sub-prime mortgage bonds have soared to new highs for the move. The one we monitor set a low of 38 in October and rallied to 52.6 in February. After slumping to 48 in early June, it rallied to 54 three weeks ago. The set back was to 52.5 and now it is at 56. The latest surge is getting compulsive.
This celebration of risk could expire within a few weeks.
The reversal could lead to serious dislocations in bond sectors that have yet to be hammered by the great global contraction.
Today is interesting. The dollar and most commodities have been firm. The stock market has been firm to steady.
On the near term, the DX could rise for a few trading days and that would stall out the rally in orthodox investments.
This could be brief as the good vibes could run for up to a couple of weeks.
Otherwise, the Dollar Index is in a solid uptrend. As troubles appear in the fall the dollar could take out resistance at the 89 level. That was set with high momentum as the financial crash completed in March 2009.
Using a different model, the ChartWorks has had a target of 90.
Link to August 10 ‘Bob and Phil Show’ on TalkDigitalNetwork.com:
BOB HOYE, INSTITUTIONAL ADVISORS