The Week Ahead 1/25/10

{+++}What a week.

Weak quarterly results from Bank of America and Morgan Stanley together with President Obama’s latest round of financial industry regulatory proposals drove a sustained three-day decline in the back half of the week. Adding to concerns, China took steps to curb lending and investment in key sectors in order to cool off its booming economy as it reported Q4 GDP growth well above 10%. The surprise victory by Scott Brown in the Massachusetts special US Senate election shook up the political scene in Washington DC, deprived the Democrats of their 60-vote supermajority in the Senate and put the viability of healthcare reform in question. Democrats fleeing from the coattails of a President with a sinking popularity and emboldened Republicans continued to press the Administration, as evidenced by the eroding support for Ben Bernanke’s reconfirmation. By Friday afternoon, it became clear there was a strong possibility that Fed Chairman Bernanke would not be confirmed before the end of his current term, and might be replaced by skittish legislators looking for political cover. Needless to say, this did not reassure markets. Traders fled to the greenback and dumped commodities, while the VIX volatility index jumped nearly 60% to just below the 28 handle by the close on Friday, its highest level since last November. US stocks had their worst week since last March: the DJIA fell 4.1%, the Nasdaq dropped 3.6% and the S&P 500 declined 3.9%.

The big US banks have had a very bad week. After announcing $90B in fees on risky bank behavior last Friday, President Obama this week proposed that banks be prohibited from running proprietary trading operations or investing in hedge funds or private equity funds as a way to limit the risk of another financial crisis. White House Advisor Austan Goolsbee insisted that the proposal did not amount to a return of Glass-Steagall. The plan is the brain child of Paul Volker, and some commentators see it as a sign of Treasury Secretary Geithner’s waning influence at the White House, and possibly as proof Geithner will be dumped soon (one analyst even speculated that White House Chief of Staff Rahm Emmanuel could be installed as Treasury Secretary). For his part, Geithner said that banks will have choices on how they will comply with plan and that the government simply wants to limit risk-taking, not break up banks. Sure they will Timmy, just like you couldn’t figure out TurboTax.

Traders’ desire to offload risk was not only evident in debt and equity markets. Commodity prices moved sharply lower across several main categories while stocks declined and the dollar rallied. Front month crude dipped below $75 for the first time in nearly a month as some noted EIA figures that suggested US crude demand has dropped below the worst levels seen during last year’s recession. Spot gold tested its 100-day moving average of $1,086 for the first time since July. The Feb contract is down nearly $50 on the week at $1,090 and traders are eyeing some key support at the $1,074 (December low, October high) and $1,050 (uptrend line from November 2008 low). March silver is off more than 40 cents on the week to trade back below $17 while copper has been the most resilient metal, buoyed by strong Chinese GDP figures.

Results out of regional banks were largely positive. Super-regional banking names Wells Fargo and US Bancorp outshined their larger brethren. Wells surprised with a small quarterly profit, versus expectations for a loss. That outcome included the $0.47/share charge for repaying the bank’s in TARP funds. USB was largely in line with expectations.

Fear ruled the roost last week. Investors always shoot first and ask questions later and I’ve always said that fear is a more powerful emotion than greed.Futures, so far are slightly green from what I see. If the “kick Bernanke out” rhetoric can lose some steam it will be a big step to getting this market to level off. Since the close of the market Friday there has been significantly more positive input on Bernanke. I think both sides of the aisle now realize that it would be insane not to give him another term, if for no other reason than to save the market.

The State of he Union speech on Wednesday will be watched closely by the market, we also have the Fed rate decision on Wednesday and we will also see a huge stream of quarterly earnings.

The Bank of China just announced an obscene capital raise and that isn’t good. Whether you like it or not we are really keying off the happenings over there. Take a look at TAO and FXI on the daily chart, two good indicators of what their market has been going through.

The bulls need to reverse things quickly if they want to get back in the game, because the bears are clearly in charge now and we need to watch the 1080 level for support. The week ahead promises to be extremely volatile. The first burst of easy money on the short side has been made the last few days, admittedly not enough by us. We need to watch this shake out the next few days. I’m not that optimistic from the long side, but you just never know. The action in the financials was horrifying last week and eerily reminiscent of late 2008. The volume was off the chart and that is a sign of a real change. Many of the sellers were longs that had great profits and many initiated short positions in the group. If any good news can squeak its way out of this mess you can count o a strong counter trend rally. Right now it’s too early, I think this week will set the stage for the next six months so stay tuned.We also need to see that if we do get a rally, will it be immediately  sold, if that happens you can take it to the bank that we are going lower.

We will regroup when I get some more signals. No names tonight and good luck tomorrow.

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