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December 20, 2009 – Comments (13)

.... Yep, it's Financials. Peee-Yeewwwww!!!

I am very vocally bearish on financials for the long term. I think they are the cancer of the US economy. Monetary policy over the last 20 years have allowed for, encouraged in fact, the economy to become financially top heavy. I could go on a rant (and have many times in the past regarding financials) but I will not. I am very long term bearish, and I will leave it at that for the moment.

13 Comments – Post Your Own

#1) On December 20, 2009 at 9:39 PM, binve (< 20) wrote:

Here is my P2 count for financials. I think P2 is done for the sector. There is a possibility that the action the last 2 months was an X wave and now working on Z of P2. If this is the case, then I don't think it will make substantially higher highs. In fact I would expect it to make what amounts to a double top.



But there is a difference in being long term bearish and recognizing the possibility for a near term upside move. And I think there is one. Here are the two basic scenarios that Gumbo and I see (we have been discussing this recently)

- (binve scenario): We are in Minor 2 up of Int 1 of P3. Next wave up is a Minute C of 2.

- (Gumbo scenario): We are in the final wave up of Int Z of P2. It will make a slightly high than Oct high

So the way I am playing this: I am waiting for the move within silly season to run its course and will be establishing a long term short position in XLF probably in early January. This will be a "short it and forget it" type position.

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#2) On December 21, 2009 at 5:54 AM, LiveOakGrey (< 20) wrote:

Hi Binve,

You do some great work, and I've read your other blog and many of the links you give in it.  Unfortunately, I don't understand much of the technical analysis and can only say it's an inspiration to hit the books and learn more about it.

You say you are long term bearish, so am I.  I don't buy any of the idea that emerging economies can 'decouple' so quickly, nor that they will surpass the West without having buyers for cheaply made goods.  The emerging middle classes will have to wait.  What reasons are you long term bearish for?  Is it anything beyond technicals?  In my case, I think that the decades of political irresponsibility by every administration has doomed us to long term consequences.  Causes and effects that are coming home to roost.  I think we'll have ten years of problems, and easily it could be longer.  

Any thoughts on how long you see things being bad, and which regions and sectors being hit the worst?

-Grey 

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#3) On December 21, 2009 at 7:04 AM, bucheron (84.21) wrote:

Can you smell what the rock is cooooking!, but seriously, technical analysis you've got to be sad in life to believe that thing works!

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#4) On December 21, 2009 at 9:28 AM, russiangambit (29.40) wrote:

> Can you smell what the rock is cooooking!, but seriously, technical analysis you've got to be sad in life to believe that thing works!

One thing is for sure, it works better than fundamental analysis. And I am much more inclined to do fundamnetal analysis, but you got to have patience with fundamnetal analysis and deep pockets, which I don't. 

When the government takes alsmost full control of the economy  then no matter what analysis method you have it won't work. And that is the situationw e are curerntly in. The market is unhinged, the pricing signals don't work, the fundamnetals dont' work.

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#5) On December 21, 2009 at 9:34 AM, russiangambit (29.40) wrote:

Binv, on the subkct of the financially top heavy -  don't you think US is repeating the UK model?

US is a fallen empire, which managed to salvage itself somewhat by allowing strategic defeat , i.e. willingly giving up colonies which it could no longer control/ support.

Then they lost their manufaturing to cheaper locations earlier than US. They got into all kinds of services and financials for the population to be able to make a living. They got hugely overpriced housing. They have debt, they have QE. 

I think we can pretty safely conclude that whatever happens to UK will eventually happen to US. It is just that UK is smaller, so their problems are easier to get back under control. Actually I am not sure how UK has been able to avoid a crisis so far. May be there is a hope for the US after all, since UK is at least 10 years ahead with their problems.

 

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#6) On December 21, 2009 at 9:41 AM, binve (< 20) wrote:

LiveOakGrey,

Thanks! I appreciate that!

I actually wrote a very large post a few days ago talking about the big picture bearish scenario here: The Long View - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=314202. And I very much agree with your second paragraph

I discuss some possible timelines for the bear market in that link. As far a sectors go, I don't think there is any sector that I am more bearish on than financials. But I think another likely sector to fare poorly would be consumer discretionary

Thanks!

bucheron,

but seriously, technical analysis you've got to be sad in life to believe that thing works!

Well then I suppose I am a sad, sad, misguided soul twisting aimlessly in the dark.

Thanks for a very useful comment.

russiangambit,

One thing is for sure, it works better than fundamental analysis. And I am much more inclined to do fundamnetal analysis, but you got to have patience with fundamnetal analysis and deep pockets, which I don't. 

When the government takes alsmost full control of the economy  then no matter what analysis method you have it won't work. And that is the situationw e are curerntly in. The market is unhinged, the pricing signals don't work, the fundamnetals dont' work.

Amen to that! When monetary policy is so twisted and the US Treasury Bond market (the largest market on the planet) is not allowed to operate according to market forces, all kinds of false signals get generated to hamper real economic growth. Money Flow signals the way they are traditionally interpreted are not reliable, GDP is not reliable. There is so much in which the buyer must adhere to 'caveat emptor'.

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#7) On December 21, 2009 at 9:51 AM, binve (< 20) wrote:

russiangambit,

Those are good observations and questions.

The reason I think the US will continue to fall much harder compared to the UK --- The Dollar is still the reserve currency

The Pound Sterling was the reserve currency up until the 1930s and its failure during the late 1920s and the US Federal Reserve trying to prop it up was one of the causes of the Great Depression.

Since then both economies have become financially top heavy, but only the US Dollar is the reserve currency now.

Which means that it can inflate with impunity for a very long time, but at some point the inflation hits a tipping point and begins to exascerbate the finacally top-heavy structural imbalances in the economy instead of hiding them.

I think we are past the tipping point and the next round of massive inflation will hurt asset class performance, equites especially and financials most of all.

It all has to do with confidence

As soon as financials get in trouble again (such as severely diluting shareholders to repay TARP which puts them in a position of weakness / loss of confidence), then the government just changes the rules.

The last time they changed the rules on mark-to-market, everything was oversold. Now everything is overbought. At some point, all these rule changes does nothing but reinforce the underlying weakness of the financial system.

The government has changed the rules so much and made the playing field so unfair for financials, that it has exposed that there is nothing fundamentally holding them up. It is now nothing more than a confidence game. And if you are confident in the US government to prop them up indefinitely?

But the Fed is monetizing MBSs like there is no tomorrow, it is monetizing all the long term treasury debt (it is the only entity buying the long end of the yield curve) and the government is *raising* the national debt ceiling while tax revenues are falling. Which puts a larger debt monetization burden on the Fed.

So any logic investor will consider the US Dollar high risk. I have very little doubt that the Dollar will suffer a confidence crisis in our lifetime.

But if confidence in the Fed and Dollar comes into question, and the financial system is based now solely on confidence, how will financials fare in that environment?

So I think all of this manipulation eventually forces a currency crisis in the US Dollar, which financials will respond to the most poorly. Which is why as bad as UK Financials will fare, US financials will fare much worse.

My $0.02. Thanks man!..

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#8) On December 21, 2009 at 11:45 AM, chk999 (99.97) wrote:

Sorry, that was the red beans and rice.

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#9) On December 21, 2009 at 11:54 AM, lordscleaners (< 20) wrote:

Some are ok..primarily asset managers and cash rich insurance companies. Some of the mezzanine finance guys are worth a look as well.

http://yieldpig.blogspot.com/

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#10) On December 21, 2009 at 12:15 PM, dragonLZ (99.33) wrote:

binve, if you are long term bearish on financials, why did you close your FAZ and SKF green-thumb picks just a month ago?

I see you were down 127 points on FAZ and 112 on SKF (both financial shorts) so I guess these ddn't turn out to be such great calls for you.

However, I still don't see why did you close them if you are long term bearish on financials.

Also, could you please explain what is the benefit of the charts you come up with if you end up green-thumbing financial bear ETF's on 3/16/09 and closing them on 11/3/09 (wasn't this exactly the best time in decades to be bullish on financials?)

Please explain as I love charts myself.

Good Luck!

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#11) On December 21, 2009 at 12:20 PM, binve (< 20) wrote:

chk999,

LOL! Nice :) At least it wasn't a Kimchi fart :)

Man, it is so good going in one end, but so bad for everybody else coming out the other end .... :) Hey you started it !!..

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#12) On December 21, 2009 at 12:32 PM, binve (< 20) wrote:

dragonLZ,

If you are going to go through my picks and question them, do me the coutesy of telling the whole story

On 11/3 I closed TZA, FAZ, BGZ, SKF, and SRS. I green thumbed them months ago and let them go against me in Caps. (Not in real life). Caps places a premium on accuracy and so I was giving them a shot to recover in the intervening months. It was a Caps gamble: let them go positive and recover accuracy on the positive side, or let the points go against me on the negative. On the negative side, however my downside was limited. They can only go to 0, which results in a 100 point loss + whatever the SPX gained. In this case about 20%. So I had a max downside risk of 120 points x 5 picks = 600 points.

Chump change in the big scheme

But what you failed to mention is that I reopened all 5 picks (TZA, FAZ, BGZ, SKF, and SRS) ON THE EXACT SAME DAY. I was able to get back in at a much higher basis. My bet is these will turn out to be multibaggers from the level when I re-green thumbed them, and will easily exceed the Caps point losses that I accepted earlier.

So that's my rationale. And that is the view that I discuss in this post.

I am not asking for your agreement with it, nor do I care if you do..

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#13) On December 21, 2009 at 12:57 PM, dragonLZ (99.33) wrote:

binve, I'm not going to argue, nor I wanted to. I just wanted to know why did you change your mind. Now I see, you didn't. Thank you for the explanation.

Good Luck!

p.s. However, I am still questioning usefulness of your charts...

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