Banking on More Declines
By Ron Taylor
7/23/2002 1:33 PM ET
schaeffersresearch.com
A while back I wrote an observation telling people to sell their banking stocks entitled Leave the Banks and Head for the Hills . Yesterday we started seeing some of the news come out regarding the shady dealings that two major banks conducted in their efforts to assist the now bankrupt Enron (ENRNQ: sentiment, chart, options) . Apparently, J.P. Morgan Chase (JPM: sentiment, chart, options) and Citgroup (C: sentiment, chart, options) disguised loans as trading liabilities. This new damning evidence regarding ENRNQ has come out similar to Merrill Lynch (MER: sentiment, chart, options) in the form of internal e-mail messages. C is currently trading down 16 percent on the news.
My suspicion is this is just the tip of the iceberg regarding banks' suspect dealings with large clients. These banks have massive off balance sheet agreements with a host of corporations, and derivative exposure that would boggle the mind. All of this in an attempt to keep the credit bubble expanding. That has been the game for years now. This is only the very beginning of this type of information coming to light. Journalists and Congress will start delving into these issues further as the bear market continues. This is assuming that Congress hasn't been totally bought and paid for by special interest, and the American public begins to actually demand that these dealings get publicly investigated. Again though this is not my specialty, I'm an options trader.
But as I've said before, the chart of the PHLX KBW Banking Index (BKX-640.30) tells me something is drastically wrong. The BKX went absolutely nowhere during the tail end of the greatest bull market in history. Additionally, the Fed cut rates a record 11 times beginning in January 2001. The banks should be printing money with interest rates this low, but the banking stocks have completely failed to rally and are now rolling over.
I continue to be very bearish on this sector. Any rallies should be sold and, based on the terrible news that is just beginning to come out, probably shorted. The banks have had every reason to rally in the past four years, yet they have failed to stage any advance. This tells me that there are much deeper problems that have yet to come out. Please avoid this sector.
- Ron Taylor |
