The Banks Are the Key

Meridith Whitney, another of the top ranked bank analysts, and one that has been dead right on the insolvency issues surrounding the industry over the last couple of years, came on CNBC to say that the first quarter earnings results should not be as bad as some have feared.

She went on to say that there was not a single stock in the bunch that she would own, and that the consumer debt problems (credit cards, mortgages, cars) would only get worse from here. In other words, while the bank stocks could rally a bit further from here throughe arnings reporting season, this will likely be the end of the bear market rally as it pertains to bank stocks. This makes the top 3 bank analysts very negative on the industry in the intermediate and long term. All agree that Citi will wind up being nationalized at some point, something that I have been saying since late last year.

So, here's the report card on the health of MAJOR corporate America. Our largest bank (Citi),at least two of our top auto makers (GM and Chrysler), our largest mortgage companies (Fannie and Freddie), and our largest insurance company (AIG)...are essentially owned entirely (and certainly controlled) by US taxpayers. Could you have imagined this scenario just 6-9 months ago?

And, because our government is so wonderful at running major corporations, this mess should have one heck of an interesting conclusion. Let me try and sum this ending up as succinctly as possible; when the wheels  start to fall off of this multi-trillion dollar failed bailout experiment....when reality begins to set in that nearly every single penny we have thrown at these insolvent companies was a colossal mistake...when the stock market drops to new bear market lows on huge volume...this is when we will finally see a level of anger in this country that will begin to seriously demand change for the first time throughout this entire economic meltdown. Sure, people havebeen mad to date, but we've yet to see the kinds of demonstrations and marches that are now a common occurrence throughout most of Europe. People will finally be "mad as hell and not going to take it any longer". Unfortunately, it will take the worst economy in over 70 years to snap most out of their deep slumber. In my view, only then will we see our politicians get even semi-serious about righting the wrongs that have occured over the last decade that saw criminal acts of insider dealing and a system of justice that encouraged, rather than prosecuted, these corrupt conspirators.

Finally,the charts and market internals tell me that the market is losing steam, but that it might want to make one more run before completely rolling over. Exactly when this happens is almost impossible to predict, but because this 23% bear market rally started with the banks and brokers, it will surely end with them as well. I will be watching Goldman Sachs, JP Morgan, Morgan Stanley, and Bank of America, etc., very closely for signs of capitulation. Take this final comment to the bank: bear market rallies end with a BANG, so when you see the market drop 500 points or so in one day, you will know that the next big leg down has begun.

Kip Herriage

Editor, VRA