Darshan's Blog

Darshan's Daily Market Ponderings

Want To Buy A Bank or Two?

Tuesday 3rd November, 2009

Alright people! That's the third day in a row that we've nailed these markets. While everyone else complains about the volatility - I'm like a kid a sweet shop.

Yesterday, we had more evidence of the market not caring about news. There was a notable improvement in the ISM Manufacturing figures yesterday. Most importantly, the employment component showed a higher reading for the first time in two years. Great news right? Well, if only. The markets flew up almost 20 minutes before this news was even released. I watched as my Twitter feed exploded with 'Off we go!" and "Economic recovery is real" - from people oblivious to the fact that the move was a pure retracement from oversold levels brought about by buy stops being triggered all the way up. Of course, those cheerleaders went eerily quiet when half an hour later, we were beginning our 177+ point decline from the highs of the day. Not only were the ISM Manufacturing numbers, highly irrelevant to market traders - from a fundamental point of view, it only accounts for 10% of the US economy. So if you're into your economics, you need to pay attention to the Non-Manufacturing figures tomorrow. If you're into making money, just follow the price action.

Of course, it's not all about the USA is it. Here in the UK, our brilliant (said with more sarcasm than you could imagine possible) chancellor Alastair Darling has unveiled his plans to downsize RBS and Lloyds Banking Group. Well actually, he's only doing this because the European Commission has demanded such action - they fear that both banking groups are at an advantage because of their Government aid. Hmmm...you have to ask - why have the EU Commission suddenly realised this?

So how will the plans affect the market? Well they won't. Sure we'll see a short-term dip in the prices of both groups but essentially, I think the Goverment will do what it takes to protect their investments in the banks. (This will not be so easy, when the next crisis causes the global markets to unravel - i.e...an unravelling of the US dollar pumps). The other reason this will have very little short-term impact is because the action demanded is to happen over the next four years. By that point, we will have had our drop to below March lows on the markets, begun our journey back up and well, if we're not in a better economic position by then, then really somebody needs to answer a lot of questions.

So what specific actions will RBS and Lloyds take?

Well Lloyds Banking Group will sell 600 branches and RBS will dipose of 318 branches. Anyone fancy an old bank to turn into a new bank or perhaps a trendy wine bar? I might pick one or two up. Of course, there is another catch - while RBS has no choice but to stay in the Government Asset Protection Scheme (GAPS), so that it can be insured for past toxic loans, Lloyds has decided to cut away from this, so that it can have more independence. The priviledge for doing this is a #2.5bn pay back to the Government. So that's one banking giant on it's own, if the HBOS and Bank of Scotland toxic debts turn into crystalise dlosses and it will be doing so by raising #21bn through the market. Just how bad a position is RBS in, that it is willing to pay #700m a year to protect itself through GAPS? The answer is pretty bad.

The bigger concern for me, as a UK taxpayer, is that Darling is ploughing another #40bn into the banks. Are we just going to keep putting funds in there to backstop the banks? Why are we allowing this? We're insuring RBS for over #282bn of past toxic loans. Are we crazy? The bank is pretty much a nationalised entity and by keeping it on life-support, we're getting distracted from other areas, where the money could be infused directly - schools, communities, hospitals etc. Do we even trust Darling and his merry men? Remember, we were told that our stake in RBS would not exceed 74% - it is now standing at 84%. Sure if the toxic loans do not turn into actual losses, then sure we can make a nice profit on this gamble but if they turn sour...that's up to #282bn of liability blowing up in our faces.

At the end of the day, market forces always win and businesses that are run by inept leaders, will pay the price in the long run. What I can see happening, is new banks coming on to the high street. If any of you are thinking of setting up a bank - then one where customer service is personal and there are absolutely no call centres, would be a market niche to fill. You know the kind of bank that does what a bank should do? Keeps your money safe and lends you money when you need it (with good reason).

Right so with my rant out of the way, let's move on to the markets.

Quick recap of what I said yesterday?

"Right now, we are very oversold and so we should expect a rebound of sorts to retrace some of Friday's losses. If we manage to retrace all the losses, then it will be very bullish but I expect a pump up to about 9888 on the Dow and then a correction to test those lower numbers mentioned above, before we rocket up again."

I do apologise for being slightly out - we bounced from 9685 to 9855 and then we corrected to the lower numbers, as stated in yesterday's blog. Of course, I shouldn't be too sorry because the moment I saw it stalling in the mid 9800s, I posted real time in the comments section that it should now make the move lower. Of course, it did just that and went for the gap fill down to 9681. So altogether you could have had a round trip minimum profit of 344+ points yesterday!

Of course that's yesterday and today is today. So what has happened since? Well we've just bounced around from that level and the Dow has bounced off the 9685 area three time two days so far. It feels like we still need to tag that 9600 area on the Dow and 1020 on the SPX (or just slightly below)...but who knows, it might not be entirely necessary. When we do bounce, I expect a move to test upside gaps at 9889 on the Dow and then we shall see. Similarly, I can see the SPX getting to the 1065-70 area first. Those are just levels that I have marked on

All I know is that I see the market higher this time next week, then where it is right now. What we have right now is a lot of positive divergences on the intra-day timeframes and that combined with an oversold market tagged by funds playing games last week, I think it's going to kill a lot of bears who think we're in for the big crash. We have the Fed meeting tomorrow, funds waiting to get back in a better price and the USDX hitting resistance. All a perfect line-up to create a short-squeeze in equities.

That's all for today - I'm all talked out.

Happy trading!

Darshan

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