This note was originally published at 8am on December 20, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“It is the machinery of banking which makes this imbalance possible.”
-John Maynard Keynes
While I am not sure what machinery Banker of America’s Brian Moynihan uses to make his economic and risk management forecasts, I am certain that he does not use the same machines we do. We use fractal math.
I’m also confident that The Machinery of a globally interconnected marketplace of colliding risk factors is completely misunderstood by the academic source code that drives these Investment Banking Inc. estimates – classical Keynesian economics.
“The Machine” is actually what the best Global Macro Risk Manager of the 2007-2011 period (Ray Dalio, who I highlighted in yesterday’s Early Look when asking the question, What’s True?) calls economic “reality” – and sometimes it bites.
It certainly has in December.
At an “Economic Outlook” (scary) conference in Charlotte, NC yesterday, the embattled CEO of BAC channeled Hedgeye by suggesting “2012 will be another year that’s a grind in the economy.”
Notwithstanding that Moynihan is 12 months late in recognizing economic reality and its impact on Bank Of America’s cash earnings (Net Interest Margins (NIM) collapsing), we still can’t figure out how he comes up with a +2.1% US GDP estimate for 2012.
Neither can his shareholders.
On December 31, 2010, BAC’s stock price was $13.34/share. Yesterday it closed at $4.99/share. While that sounds like a weekend special on a slab of flank steak, at down -63% for the YTD, it’s even “cheaper” than that! A value meal at Mickey D’s is going to have a tough time competing with that price (even if you adjust for a black car service taking you through the drive thru, paying for gas).
As the venerable value investor Marty Whitman reminds us, “A bargain that remains a bargain, is no bargain.”
But what does this collapse of the US money-center banks mean? Isn’t this all Europe’s fault? Or this morning, should we just Blame Canada?
With the SP500 down -3.3% for December (after being down -0.6% in November and down -11.6% from the April 2011 high where the likes of Moynihan said US GDP Growth was going to be up +3-4%), how about we blame ourselves for once?
The Machinery of the globally interconnected marketplace has not changed. Unfortunately, neither has Old Wall St. It’s time we Embrace Uncertainty in our growth and inflation assumptions and stop begging for The Bernank to “smooth” the business cycle for us or our Too Big to Bail banks are going to be sitting right back where they were 23% higher in the S&P (October 2007).
In the meantime, here’s what going on in this morning’s USA Macro Grind:
- SP500 is testing its only remaining line of support in our TRADE/TREND/TAIL model (TREND = 1207)
- US Equity Volatility continues to hold its long-term bullish TAIL line of 23.11 support
- The Range (of risk) in my immediate-term probability model for the SP500 is 72 points wide (manageable)
- US Stock Market Volumes are as dead as the trust Americans have in Big Government Intervention markets
- Sector Risk: Financials (XLF) led decliners yesterday and remain in a Bearish Formation (crashing -23.2% YTD)
- Sector Signals: Consumer Discretionary (XLY) and Consumer Staples (XLP) hold up relatively well with Strong Dollar
- Strong Dollar = Strong US Consumption (try it at the pump this weekend, you’ll like it)
- US Dollar Index is busting a move into a Bullish Formation with immediate-term upside to 81.24
- US Treasury Yields continue to signal that Growth Slowing will be here through Q112 (10yr = 1.85% this morning)
- Yield Spread (proxy for growth and US bank earnings) = +161 basis points wide, and compressing
Outside of the USA, the Top 3 Risk Management items to recognize as reality today are:
- Eurocrat Bazooka is more like a pepper-gun
- China says they are not going to implement a “large stimulus”
- Greece is going away
Don’t worry SocGen vacationers, I don’t mean the Greek islands and beaches – I just mean their stock and bond markets. Greece issued 3-month piggy paper at 4.68% this morning and her stock market hit a fresh YTD low at 644 on the Athex Index (down -62.4% from Q111).
I suppose that if we give Keynes a bailout do-over on the quote about The Machinery of banking, he’d have to call the money printing and piling-debt-upon-debt solution to Greece one heck of an “imbalance!”
God Bless America and the opportunity we have here to stop what we are doing. It’s time to Re-think. Re-work. Re-build.
My immediate-term support and resistance ranges for Gold, Oil (Brent), German DAX, French CAC, and the SP500 are now $1568-1614, $101.34-106.28, 5573-5807, 2905-3043, and 1193-1213, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer