Market Commentary

Market Commentary
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By Capital Multiplier | 30 April 2009

One of the notable features of the stock market’s recent rally has been the surge in battered U.S. banks and financials in anticipation of the results of the American government’s "stress tests" on the nation's 19 largest financial institutions. Recently, The Federal Reserve released details of how it conducted the "stress tests" and announced that "most banks currently have capital levels well in excess of the amounts needed to be well capitalized." There you have it folks: those U.S. government bureaucrats who did not see this global financial crisis coming and who have so far done everything in their power to rescue those (favored) Wall street banks (of which Lehman Bros. was not one), and to hell with the global economy, have now declared the U.S. banking system to be "OK" and there is nothing to worry about. Must be time to back up the truck and buy bank stocks, right?

Not so fast! If there is one person who can be considered an expert on this topic it's William Black, former senior bank regulator who served as counsel to the Federal Home Loan Bank Board during the S&L Crisis of the 1980s. In recent interviews Mr. Black has described these bank stress tests as "a complete sham," and called the Treasury's toxic debt plan, "an enormous taxpayer subsidy for the people who caused the problem." According to Mr. Black,

"With most of America's biggest banks insolvent, you have, in essence, a multi-trillion dollar cover-up by publicly traded entities, which amounts to felony securities fraud on a massive scale. These firms will ultimately have to be forced into receivership, the management and boards stripped of office, title, and compensation. Right now, things don't look good. We are using taxpayer money via AIG to secretly bail out European banks like Société Générale, Deutsche Bank, and UBS— and even our own Goldman Sachs. The government is reluctant to admit the depth of the problem, because to do so would force it to put some of America's biggest financial institutions into receivership....And you have seen no regulatory action against what amounts to a $2 trillion accounting fraud."

Global economic reports showed further signs of deterioration last week as:
i) According to the latest report from the International Monetary Fund, losses for global financial institutions due to the current recession and credit crisis may reach $4.1 TRILLION by late next year! In a separate report, the IMF described the current downturn as "by far the deepest global recession since the Great Depression," and predicted the global economy will shrink 1.3%this year accompanied by growing unemployment levels worldwide,
ii) U.S. initial jobless claims rose last week to 640,000 while the number of people staying on jobless benefit rolls rose to a record 6.14 million last week,
iii) According to the National Association of Realtors, U.S. existing home sales fell 3% in March to a seasonally adjusted annual rate of 4.57 million units accompanied by another 12.5% year-over-year decline in the median sales price of existing homes,
iv) According to Britain's Office for National Statistics, the U.K. economy shrank 1.9% in the first quarter marking the sharpest decline in the country's GDP since 1979! The weak economy continues to take a heavy toll on the British job market pushing the unemployment rate to its highest level in 12 years…,
v) Spain's unemployment rate soared to 17.4% last month— with nearly 2 million jobs lost in just the past 12 months— as the European country continues to suffer the painful aftermath of one the biggest housing bubbles in history, and
vi) Reckless government spending plans continued to push U.S. interest rates higher last week with yields on benchmark 10-year notes touching their highest level in five weeks in anticipation of a flood of new supply. This could have significant negative ramifications for the housing market by pushing mortgage rates higher from their recent record low levels
vii) While there have been a few nascent signs of economic stabilization in recent weeks, the overall global macroeconomic scenario remains bleak because the reckless and irresponsible actions of global policymakers are increasing the risks in the global financial system! After their recent significant rally, stocks look ripe for a sizeable pullback. The depth of that pullback could provide important clues about future market direction.

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Normxxx    
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