Financial Regulation Friday – Finally!

June 25, 2010

593

That's all I'm going to say about it. I'm sure there will be thousands of places to read all about it all weekend. I'll just say that it's about freakin' time SOMEBODY did SOMETHING to reign in the madness. Whether it's a good bill or a bad bill doesn't really matter as much as the concept that financial institutions NEED to be regulated. The rest we can get right over time. I consider this to be a huge market positive because the Financial sector has grown like a cancer on the markets since deregulation. When corporate profits totaled $4Tn in the 80s, the Financial sector made $400Bn – now that coprorate profits are $6Tn, the Financials make $2.5Tn – that's 40% of all the money earned in corporate America and ALL of 2 decades worth of growth going to the Financials!

Not only that, but that $2.5Tn is AFTER bonuses and dividends that add another $2.5Tn to the total so out of $8.5Tn earned in corprorate America, 60% goes to one sector. That's what a cancer does, it sucks resources away from the healty organs in the body and eventually grows big enough to kill it. America has gone from a country where investors make money by investing in companies that build things and sell things and create jobs to a country where investors gamble with "investing institutions" and, rather than put money into creating energy solutions, we trade 6Bn barrels of oil per month back and forth on the NYMEX in order to decide who will end up taking delivery of 25M barrels (0.4%) at the end of the month.

Why do they do it? The fees, the fees, the fees, the fees. Even the stock market has become a casino and not only do the financials make the fees but they build a culture that tells you to BUYBUYBUY and SELLSELLSELL every other day so they can rake and rake and rake those fees but that is not enough for them – they also have to insert themselves in as Market Makers where they make money on the spread every time you buy and sell but that is not enough and they then track your trading and write programs to analyze your trading patterns so they can bid against you – YOU, their CLIENT!

That's still not enough so they game the system by taking on the role of "trusted analysts" who also flip-flop the buy and sell signals on a regular basis to churn more fees while the investing houses line up their bets prior to placing a company on the "conviction buy" or "conviction sell" list and then they run programs to "optimize" their outcomes no matter which way the market goes. How good are they at this? Well Goldman Sachs hasn't had a negative trading day in 2010. That's pretty impressive isn't it? Some might even say impossible or "fixed" or "cheating" or "manipulation" but I say good show! And good show to JPM and BAC, who also managed this amazing feat last quarter – NEVER losing.

It's like the 1972 Miami Dolphins and the 2007 New England Patriots and the 1934 Chicago Bears all win the Super Bowl in the same perfect season and then they all celebrate at the bowling alley where everyone on the teams then makes 12 strikes in a row for about 400 perfect games… No, it's not a scam – They are just THAT good! What's hilarious about this is none of the rich, top 1% investors who defend these people seem to realize that they too are victims of this fraud. How is this possible? Because GS makes them money! Sure GS makes them $1M but makes themselves $3M (75% of GS profits were paid in salaries and bonuses), but $1M is better than nothing.

Sadly, it's not better than nothing because if we cut out GS and the rest of the Financial cancer that has formed on our economy, then that 75% (about $5Tn), would end up in the hands of productive corporations and (dare we dream?), perhaps even into the pockets of the bottom 80%. Anyway, we are a long way away from real reform but, as I said, it's a start.

Not a good start is our revised Q1 GDP, which was knocked down 10% from the previous estimate to 2.7%, mainly due to a smaller than expected gain in consumer spending and a larger than expected trade gap as US consumers lose jobs so they go to WMT and the Dollar Store where they can buy cheaper goods that are made overseas which closes more US factories and Retail Stores so more people end up on unemployment and shopping at Wal-Mart and the Dollar store, which gives China even more money and hurts our balance of trade which damages our GDP and drives investment dollars out of the country leading to less manufacturing over here and more job losses with more unemployed people heading over to Wal-Mart and the Dollar store to buy Chines goods. Boy am we smart!

You may imagine you are smart and that the poor GDP number and the scary financial reform bill will send the markets lower but – think again! We are already lower in anticipation of these events and the Senate, as I mentioned yesterday, also failed to extend unemployment benefits, which will immediately terminate 1.3M people's benefits effective today and another 250,000 people's benefits will expire each week from now through the November elections until all 6.8M people currently collecting benefits are no longer eligible – what fun! That's sure going to perk up those consumer spending numbers, right?

I'm expecting and hoping we don't go lower. The news this week has been TERRIBLE and today's news is TERRIBLE yet all they have managed to do is drive the markets down to a test of our descending S&P wedge back at our good old, reliable 1,070 line on the S&P so WE ARE NOT IMPRESSED by the bears. I think, in the very least, we should be taking one more stab at the 1,000 line before giving in so we'll be looking for that bounce either today or next week, as noted in Fallond's excellent chart (see the whole market series over at our Chart School):

I've already said to Members, if we can't get back over our lines (see yesterday's multi chart) we are going to be in "Technical Hell" but I don't think a 2.7% GDP is deserving of Technical Hell. Sure, it's not Asia's 8% GDP growth but ALL of Asia (other than Japan) is less than 1/2 of our GDP and, by the way, did you here the "growing" part of that statement. So Asia is growing 8%, Japan 1%, Europe 1% and US 2.7% – not exciting but not shrinking and last year, even after a horrific crash in March, we finished the year at 1,150 on the S&P. What then, are we doing at 1,070 with 100% of the globe reporting growth?

We'll talk about this more on the weekend. I already made my bottom call yesterday so I'm going to be a hero or a goat on Monday anyway but I do feel I'm being objective about this and that we are simply testing our non-spike bottom at 1,070, where we expected to form a base into July earnings. I had said in May, what would be best for a recovery is to flatline at our lower levels into earnings and then turn higher on good earnings. So far, so good so why bail now?

Oil is heading back to our "just right" line at $77.50 and copper has punched through $3 – these are the signs we were looking for for a market turn. The Pound is still testing the $1.50 line and the Euro is at $1.23 but money is still flying into the Yen, whic fell half a point from it's 3:30 high from 89.8 to 89.3 to the Dollar (Yen getting stronger, dollar weaker). We have blown the Omega 3 pattern unless we can finish the day at 10,350 at least – not looking likely but it should be another interesting day.