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Mark's Market Blog

7-6-09: Stock Market Head and Shoulders

By Mark Lawrence

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Well, things are started to maybe get interesting. There are two main schools of thought when trying to predict the stock market, called fundamental and technical analysis. Fundamental analysis is when you learn all about a company, its products, management, marketing schemes, cash flow, and try to decide on a real value for the stock. If the actual stock price is below the calculated real value, you buy and wait for everyone else to smarten up. Warren Buffet has made a lot of money doing this. The other school is technical analysis, which is based on the idea that markets are emotion driven, and there are certain typical patterns to look for to deduce future trends. Hedge funds have made a lot of money on this. In technical analysis, one of the most canonical patterns is a "head and shoulders." This is when a raising market hits a peak, then drops a bit, then a higher peak, then drops a bit, then a peak roughly as high as the first. You can think of this as three mountains with the center one the highest, or a head and two shoulders, or the market flipping you off. This is considered a highly bearish sign: when you see this it's time to sell everything, even the dog. In the S&P below, we can see a shoulder around May 8th, a head around June 8th, and another shoulder perhaps around June 30th. Also we see that the market which had popped above the 150 day moving average has dropped back down below it. These are considered a couple strong signs that this rally is over, it's correction time. Or perhaps more than just a correction.

Loan default rates are at all-time highs. Delinquencies on credit card debt soared to a record 6.60%. Late payments on home equity loans rose to 3.52%, and on home equity lines of credit climbed to 1.89%. Each of these numbers has increase by about 15% since the previous quarter. U.S. consumers ended March with $940 billion of revolving credit outstanding. Delinquencies rose to 3.01 percent from 2.03 percent on direct auto loans, to 3.70 percent from 2.96 percent on mobile home loans, to 3.47 percent from 2.88 percent on personal loans, and to 1.52 percent from 1.38 percent on recreational vehicle loans.

The number of people with net assets of at least $1m (excluding their homes) fell by 14.9% in 2008, according to an annual report from Capgemini and Merrill Lynch. The total wealth of these 8.6m "High Net Worth Individuals" stood at $32.8 trillion. Over half of the super-rich live in America, Japan and Germany, but China passed Britain to take fourth place for the first time.

Home builders are reporting more quarterly losses this week and are bracing for additional pressure from rising foreclosures and waves of adjustable-rate mortgages resetting higher. The regions that saw the biggest price spikes during the bubble continue to wrestle with the most foreclosures - California, Nevada, Arizona and Florida. Nearly 70% of the foreclosures in 2008 were concentrated in just nine states. The economy will not recover until housing prices stabilize. Housing affects not just American families but banks, credit markets and construction business and jobs.

Bill Wheat, CFO at residential building giant D.R. Horton Inc, said "Our expectation is that price drops will continue well into 2010. We've had recent moratoriums on foreclosures that have ended and I think there's still some backlog of foreclosures that will come through as well as the impact of some of the ARM resets that will still be occurring this year and next." About 1 million option adjustable-rate mortgages will reset higher in the next four years.

California failed to meet a deadline and is now issuing IOUs instead of paying bills. Illinois and Pennsylvania are currently running without a budget. Washington has higher per capita budget deficit than California. Arizona, Indiana, Ohio, Connecticut and Mississippi are also racing against the clock to pass budgets.

eHarmony says their membership is up 20% in these hard times, as people reach for any kind of stability and security.

I'm reading a book, The Creature from Jekyll Island (shown on right, the Jekyll Island Hunt Club, built and owned by John Pierpont Morgan). Highly recommended. I've been an idiot. Turns out there was a simple predictor for the collapse of GM stock which I knew but ignored in my ignorance. There's also an obvious fix for these banking crises: don't let individual banks get "too big to fail." The top 15 US banks own 58.7% of total US bank assets, these are the guys to target. Our current GDP is $14T, every one of these banks has more than 1% of the GDP in assets, more than $140B. That's my solution: banks can't get bigger than 1% of GDP. Note that this rule would have little effect on the last nine of these banks, they just have to sell off a bit of their loan portfolio. The top five banks account for 45% of total US bank assets.

The five to be broken up, and ten more to trim down:


BankAssetsCumulative
1.JPMorgan Chase Bank National Association$1,688,164,000,00014%
2.Bank of America National Association $1,434,036,734,00026%
3.Citibank National Association $1,143,561,000,00036%
4.Wachovia Bank National Association $579,258,000,00040%
5.Wells Fargo Bank National Association $552,170,000,00045%
6.U.S. Bank National Association $258,526,747,00047%
7.HSBC Bank USA National Association $177,777,752,00049%
8.SunTrust Bank $174,236,666,00050%
9.The Bank of New York Mellon $163,006,000,00051%
10.Goldman Sachs Bank USA $161,455,000,00053%
11.FIA Card Services National Association $147,720,314,00054%
12.National City Bank $146,013,198,00055%
13.State Street Bank and Trust Company $142,457,847,00056%
14.PNC Bank National Association $140,011,311,00058%
15.Branch Banking and Trust Company $139,275,251,00059%

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