Whose 2009 Low Might Be Defended? ~ The Risk Averse Alert

Thursday, October 21, 2010

Whose 2009 Low Might Be Defended?

With the end of the final leg of the market's counter-trend rally off late-June bottom at hand — this correcting the market's initial wave down from April top — and uncertain being the specific timing of this corrective wave's completion — it could come tomorrow, or develop over some days following — let's consider big picture matters separating leaders from laggards.

Albeit that, "as goes the stock market, so go 90% of all stocks making up the stock market," the march does not occur in lockstep. Some sectors will lead the trend and some will follow. Yet, still a solid majority will behave in keeping with that trend — some more decidedly than others, however.

Let me say right up front the trend never has been clearer. Look what's leading the way! They say, "money makes the world go 'round." So, consider our lowly banks and financials.

A couple relevant samples...

Bank of America
company chart (BAC)

Morgan Stanley
company chart (MS)

I previously have stated my reasonable suspicion that, defense of March '09 lows will be imperative if all things bailout are to maintain any credibility, as well as all associated matters emanating from the land of make believe that, through and through, characterizes the political soul of the United States these days.

At the front line in the effort to defend March '09 lows, of course, largely will fall banks and financials. And technically speaking, it appears those firms able to survive, indeed, might see their March '09 lows defended (or contrarily find bottom somewhere not much lower). After all, many of these stocks already have reached that "foundational" objective of mine for the broad market: levels last seen in the 1987-1994 period.

Now, let's take a closer look at BAC. The simple fact is this thing could fall 70% from here and still remain above its March '09 low!

Have no doubt. This firm remains crippled by circumstance preventing it from inflating its balance sheet further. Absent this capacity in the midst of a brewing crisis threatening to crush its real estate exposure (via the imminent blowout of a wide swath of residential MBS), a BAC retest of March '09 lows certainly is not out of the question.

Ditto Morgan Stanley, a firm I understand to have a great deal of RMBS exposure. Like BAC, a 70% decline in MS still would find the stock above its March '09 low.

Now, let's turn to Treasury Secretary Geithner's recent, strong statement toward the exchange rate value of the U.S. dollar...

You might find this odd, but I do not consider the Treasury Secretary's defense of the dollar mere idle chatter. Yet there are but two ways by which a strong dollar might be accomplished: one temporary, the other more assuredly enduring. The former no doubt is the intention of a well-groomed imperialist like our nation's Treasury Secretary. The latter will require reconstitution of a form of national bank providing credit for state-of-the-art, transformative infrastructure projects offering to astronomically increase both the efficiency and productive power of the physical economy (and windmills and solar panels simply do not fit the bill).

Let's be clear: Geithner is to Hamilton as Mussolini is to FDR or Lincoln. All eyes open, then, to the coming sweep in Congress of the party that, the Nixon administration permanently divorced from its standard bearer (who now is featured in my #1 Geico commercial). All things are converging on an austerity regime. This is how our Treasury Secretary aims to put a floor under the dollar. It is Treasury's only hope, too, of maintaining political relevancy amidst the coming Republican sweep in Congress.

So, imagine that, basically all equity outside banks and financials must follow the trail blazed by these now dead, former fonts of infinite investment capital — and this no matter institutional support presently existing right up to the lender of last resort. The dollar needs defending, so the load on the only pillar capable of supporting the securitization Ponzi scheme must be redirected. Thus, the physical economy — imbalanced as it is — is likely to suffer further. In other words, private enterprise must be further sacrificed so that prime assets backing an insolvent financial system's toxic crap might be grabbed for pennies on the dollar.

Be it by hyperinflationary blowout or deflationary collapse, these alone are the remaining outcomes available to those whom I kindly call Monetarist Monkeys (who in truth are fascists). Our distorted reality requiring defending is meeting its end. Over the next two years an economic contraction more severe than occurred in the 1930s all too likely appears in store.

The shadow banking system's infinite multiplier — increasingly appearing to have been built upon systemic fraud — is dead! Now follow, then, every other treasured tulip bulb whose value is at grave risk of collapsing amidst continued absence of a solid foundation under that former, most treasured bulb of all — the one supporting a global financial system whose leverage is unprecedented: confidence in securities founded on fictitious "assets."

Fast Money
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