Tuesday July 20, 2010
The Parabolic traces out a pretty clear five waves up. Since then the Money Flow at bottom frankly reflects not so much an exit of money as a lack of commitment, a lack of interest. It is as though the markets are sitting, waiting, nervously watching for clues, ie, it is summer.
The entire focus of FED Chair Bernake has been the banks. Bernake made the famous comment that one could throw money from helicopters to avert deflation or economic turn down. So far he has done that and lowered interest rates to zero. In addition FASB 157 apparently allows banks to report profits on a markdown of their own debt! The idea was that banks could make loans as cheaply as possible, the markets would borrow, and like magic, the business cycle would be repealed. It has not worked out that way. Hedge funds like Goldman declared themselves to be banks, got money on the cheap, and gambled their way to profits. Good for Goldman but it has done nothing to create private sector jobs. This graph makes this policy failure clear. The XLF is the ETF for the big banks. Money flow into XLF peaked a year ago. The question now is whether or how much longer the 14 level of support can hold.
The so called Financial Reform Bill did nothing to address the train wreck of Fannie Mae and Freddie Mac. Instead both have been delisted from the NYSE, taken off the radar screen so to speak. FNM has no equity. Citi still trades for less than $5. And the truth is that bank regulators are tougher than ever causing banks to be reluctant to loan. Business not knowing what requirements Congress will pass next, has chosen not to hire. And here we are.
Bernake's thesis is that FDR simply did not spend enough money. So far this theory is not working out as the President asks for yet another extension in unemployment benefits, the New WPA. FDR created the Works Progress Administration and the CCC Civilian Conservation Corps to 'put people to work.'These government make work jobs however never stimulated the private sector. Now the government simply pays people not to work, bypassing the requirement of building anything in particular. For now the market lacks any reason to rally.
The bottom line is that the 8 and 13 WEEK moving averages have both crossed the 34 week MA to the downside for the first time since the recovery last spring. This is a negative technical event which tells us the trend in financials is now down.
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