Regardless what the DOW does on Monday morning – sell and keep selling.
On Tuesday, June 1st I received my regular e- newsletter from one of my favorite contrarian brokers. It said this:
“This is no time for mincing words or pulling punches. This is a special red alert, the great global debt disaster is about to trigger a U.S. stock market implosion. “
Here we are Friday and look where we are at.
I was a little busy trying to cobble together a living and didn’t take much notice of the newsletter until yesterday ( Thursday June 3rd ) There are 3 fundamental indicators that when taken together shocked even I, the consummate contrainian investor.
Spain is already beginning to seize banks. Portugal, Italty, and especially Ireland are now on what the Euro bankers are calling a “blacklist”. My source on this is an analyst with a major European bank with offices here in Phila.. As these Euro socialist economies head the way of Greece, we as investors – nay Americans must be ask the question, what is the difference between these Blacklisted Sovereign Debts and Greece. Greece goes broke – so what?
Greece went south over a measly $236 Billion in external bad paper owed almost entirely to European banks. BUT Spain – one of the worlds larger economies is on the hook for $1.1 TRILLION, owned either directly or indirectly to American Banks.
“ Like several Lehmans all failing at the same time” said newsletter:
When Lehman Brothers went under 20 months ago, instantly, global markets froze up, shutting down short-term lending, sent the economy into a nosedive, and helped drive the Dow down nearly 5,000 points.
But by any measure, a default by a country like Spain would be far bigger than that of any single corporation, with the potential to wreck even greater havoc in financial markets.
Indicator #1 The single most important interest rate in the entire world is now on the rise!
The London Interbank Offered Rate — LIBOR. This is the rate that’s behind virtually every short-term loan in the United States.
When LIBOR goes up, it promptly drives up the rates in the multi-trillion-dollar market for adjustable-rate mortgages, the $7.2 trillion market for corporate loans — and more all right here in the U.S. And right now, that’s precisely what LIBOR is doing — GOING UP!
That alone can be a shock to the global economy. But what is especially shocking is the fact that there’s virtually nothing the Federal Reserve or even the European Central Bank (ECB) can do about it. This has earth-shattering implications. It not only means the global debt crisis is heating up. It also means that the Fed and central banks around the world are losing their power to STOP the global debt crisis from getting a lot worse!
Indicator #2 The cost of insuring against big corporate defaults has nearly DOUBLED in just the past few weeks!
The two-year swap spread — essentially reflecting what banks charge for managing the risk on two-year loans over and above equivalent Treasury yields.
Last year, when Washington borrowed & printed trillions of dollars to rescue nearly every major U.S. bank in trouble, this crisis indicator fell sharply, signaling — at least temporarily — that the worst of the crisis had passed. But now, it’s surging again, up SEVEN-FOLD from its lows. The clear message: A new, potentially BIGGER debt crisis is in the offing.
That means investors believe the risk that corporate bonds will default has also nearly doubled - and I am NOT talking about just junk companies that everyone knew were risky to begin with. I’m talking about INVESTMENT-grade companies, the ones meriting some of the highest ratings handed out by S&P, Moody’s, or Fitch.
The big question: If even supposedly “safe” corporate BONDS are growing riskier almost by the day ... Imagine the massive risk investors are taking with STOCKS issued by those same corporations!
These are exactly the same indicators that told us that a Great Debt Crisis would soon crush the U.S. stock market beginning back in late 2007.
Indicator #3 American Banks Are Exposed.
This is NOT rocket science. The big dilemma is that despite the recent recovery, many of the nation’s banks are STILL vulnerable. Weiss Ratings, the only ratings group that has consistently warned investors of nearly every major banking failure in recent years rates the following in their recent report:
* Bank of America merits a Weiss Financial Strength Rating of D (weak). It still has huge amounts of bad loans on its books, with close to one third of its capital tied up bad loans alone. It’s taking massive risks with derivatives. It’s definitely not yet out of the woods.
* Citibank gets a D- for similar reasons.
* SunTrust Bank also gets a D-. Its bad loans make up an even bigger share of its capital than BofA’s.
* Overall, there are 2,259 banks and thrifts in the U.S. meriting a weak rating from Weiss, with only 962 getting a strong rating. The bigger problem: The strong banks control only 3.7% of the banking industry’s assets. The weak banks control 43.8%.
And this is BEFORE they feel the inevitable impacts of the European debt crisis on global markets or our economy!
In conclusion : It was mostly the recovery in our nation’s largest banks — bought and paid for by Washington — that created the illusion that a real, sustainable economic recovery was beginning.
That illusion triggered a recovery in the Dow.
But now, with thousands of U.S. banks barely able to fog a mirror ... and with European borrowers in danger of defaulting, these banks are now facing a new peril that they did not anticipate and we ( US taxpayers) could be on the hook for.
Adding to these 3 certainties, you cannot ignore that the prime indicator of the American markets, the mood of the American people is in the toilet. They are out of work, out of money and out of patience with big government, big oil, & big banks.
They are sellerish.
Prediction : We will see Dow 8000 ( maybe 7500 ) before we see DOW 11,000 again.
What to buy: More gold, ETF’s that are designed for short selling profits. Canadian natural gas trust that are still paying dividends.
Or go to France this summer; visit the Louvre, Normandy and Epernay while your dollar still has some buying power.
Omar P Bounds III
The Bounds Auction Company
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