Banking Stocks Breakdown Signals Next US Fed Interest Rate Cut

By: Jim_Willie_CB

In late summer, my perceived strong signal for the September rate cut proved accurate. It was the dire condition of the Wall Street broker dealer stock index, the XBD. My contention all along has been that the official USFed rate cut was motivated by Wall Street giant banker interests, whereby the actual rescue stimulus was disguised and thoroughly devious. In reality it was a mammoth subsidy for Wall Street firms. They stood first in line at the Discount Window. No obvious recession was evident in the USEconomy, except for a housing retreat (better labeled a rout).

In mid-September the US Federal Reserve did indeed cut the official interest rate, both the Fed Funds target and the discount rate. The next signal is similar. The XBD stock index has plummeted in just the last couple weeks. Furthermore, the more conventional and broader bankers stock index BKX has also hit new lows for the last 52 weeks. It looks ominous. So signals are loud and clear from the banking corners that the USFed will make its second important interest rate cut. The USFed takes its marching orders from the monolithic financial power center in New York City . The rest is lip service to the economy and households.

Whether the next official rate cut is 25 basis points or 50 basis points, that is not the important issue. Another rate cut will more firmly establish the notion that the USFed has begun a new easing cycle. There is no precedent, not a single example, not one, when the USFed has cut interest rates once and only once. They start a new easing cycle each time. The reasons are many. They ease too much when they cut rates, which produces credit explosions and bubbles that do not have staying power. They tighten too much when they hike rates, which produces recessions, a messy situation in need of remedy. They are late to end the easing cycle, which ensures long periods of bubblicious times.

They are late to end the tightening cycle, which ensures hard landings. In fact, there is no evidence of a single soft landing in the history of the USEconomy since 1971. They are incompetent in their analysis, having missed the mark badly of almost all their public pronouncements. Their ineptitude is legendary, an embarrassment to modern economics. Their statements are confused, jumbled, and tend toward steered roles if not propaganda, which serves a purpose.

BROKER DEALER STOCK INDEX PLUMMETS

The broker dealer stock index XBD is crucial. It represents precisely the powerful Wall Street interests. They call the shots with the USFed. Consider that JPMorgan is acting body of the USFed, and JPM is a member of the XBD index, a select privileged elite short list of big banking firms. Their portfolios are deeply endangered by the mortgage bonds and associated credit derivatives, the collateralized debt obligations. They are known as CDO's nowadays, whose makeup includes various amounts of subprime slime, a unique American concoction of stupid loans, reckless lending, insane leverage, laced with fraudulent ratings, and misrepresented to investors.

The September USFed official rate cut was fully announced by this XBD stock index. The breakdown in July remained in breakdown mode in August. It rebounded immediately after the rate cut. But since then, it has suffered a technical breakdown once again. This plummet is more dire in fact, since the 20-week moving average (in red) has crossed the 50-week moving average (in blue) to signal a bearish event early in its unfolding bust. The decline last week was huge, a climax occurring on Friday. Was that the anniversary of Black Monday? The XBD struggles to hold its ground, unable to lift on a bounce at all. Another USFed rate cut is again indicated. Give it 7-to-1 odds of occurring before Thanksgiving or when the snows arrive in New Jack City .

BANKER STOCK INDEX BREAKS DOWN

The banker stock index BKX is a broader index, which includes a multitude of big regional banks as well as the elite ‘favored sons' of Wall Street. If truth be known, some of the Wall Street group are permitted to hide large portfolio losses by shuffling them to a convenient cemetery for bad bonds and crippled credit derivatives, fully protected by national security directives and the blessing of the USGovt. Being a card carrying party member of the Fascist Business Model, wherein the interests of the state are merged with interests of big business, does have its privileges.

Enough! The point here is that the distress within the banking sector extends far and wide throughout the USEconomy, to almost all corners of the nation. The damage from mortgage loans, their CDO bonds, other structured investment vehicles, and a raft of credit derivatives has the potential to send the entire US banking system into insolvency. If you doubt such an event is possible, see Japan in 1989. The US housing crisis and mortgage debacle is early in its pathogenesis. My forecast is for another two to four years of declines, complete with scattered explosions like with subprimes. The subprime mortgage problem is highly visible, but in no way the end of the problem. Rather, it is the beginning. It is the portion which cannot be denied, but hardly the full extent.

The entire structured risk model is going to unravel, where all manner of offloaded risk will be upended, resulting in wave after wave of bank problems, bond crises, derivative distress, and more. The entire financial structure of the US banking system is proving to be a house of cards, bubbles throughout the foundation, improper pricing models throughout the entire network of tinkertoys in support grids, and fraud laced within its fabric. A boycott of US$-based bonds is early in development. Corporate bonds of US$ denomination are not attracting foreign capital. Mortgage bonds and their CDO derivatives are in search of bond cemeteries, totally devoid of price valuations on balance sheets. Most are actually worthless, creating holes in bank balance sheets. Some FOMC Treasury auctions have been failures. Foreign central bank ownership of USTreasury Bonds is on the fast decline. The great bond bubble is in the long excruciating process of bust. The tech/telecom stock bust of 2000 was quick, sudden, with a certain aftermath. The bond bust will take years to unravel.

The banker stock index BKX is screaming of a banking crisis loudly with shrill tones. THIS IS THE UGLIEST CHART NEXT THE HOME BUILDERS HGX CHART IN MY MODERN MEMORY!!! The July bearish crossover of the 20-week moving average going below the 50-week MA was powerful. It has worsened since July. The tragedy here is that lower interest rates might not fix much at all. INSOLVENCY IS THE REAL DREADED PROBLEM. However, those invested on the US $ bear side, on the commodity bull side, fear not! The USFed and the USGovt will deliver wave after wave of rescue measures, stimulus packages, complete with lower interest rates. The plan will be to assist banks and prevent an economic recession.

We have been in a recession for a long time, unquestionably in a recession right now, headed for one in official doctored statistical terms also. The rescues and stimulus packages will solve little. First and foremost, they will be designed to assist Wall Street firms. They will accomplish little for homeowners stuck with mortgages they cannot pay, since rates will reset higher while home values will continue down. The inventory imbalance is fast becoming a historically unprecedented nightmare. Cheaper money will not enable lending institutions to lend more money on home loans. They are too unsure of their financial condition to lend.

Fear not, investors! Cheaper money for speculative purposes will return. This is going to be a complex jumbled mess of bailouts. My forecast is for the bailouts to ultimate be at least $2 trillion, and perhaps as much as $4 trillion in magnitude. Misery will stand side by side with profiteering. Households will lose everything, while speculators in gold, silver, oil, natural gas, and other commodities will reap huge profits from investments. The division between rich and poor will widen. The US Middle Class will endure yet another squeeze, as cost inflation hits again, not accompanied by wage growth. In fact, in just three years the true inflation adjusted income level has fallen by almost 25%, an argument provided in the October Hat Trick Letter reports. All inflation adjusted statistics are an order of magnitude more horrendous than reported, since the endorsed lie of the official price inflation statistic is wrong by at least 6% per year.

CRUDE OIL SIGNALS NEXT STEP DOWN FOR USDOLLAR

In July and August, the rising crude oil price was actually more like the preface to a stealth breakout. No really clear events could be identified. In my view, the upward move to 77 in the crude oil price was a vivid indication, or better described as a confirmation, that the USDollar was going to break down below the US DX 80 critical support level. It did exactly that. In September the WTIC oil price actually made new highs, confirming the USDollar breakdown ex post facto.

Notice the swing momentum move in the price from the 71 level to the 86 level in classic fashion. A relentless march to 100 is coming in 2008. The target of the long-term Cup & Handle bullish chart pattern is scary, something akin to 100. See the bottom at 52, the break line at 77, for a 25-point potential. Thus 100-102 target. The momentum is enormous. The Turkish & Kurdish conflict along the Iraqi border is another excuse drawn to explain the crude oil price. The conflict, as Roger Weigand agrees with me, is worth $1.

The important point to take away is that the USDollar is in trouble, confirmed by a powerful uptrend in the crude oil price. New highs were reached in October, without yet a new lower USDollar index suffered. In my view, the key is Saudi Arabia and the rest of the Persian Gulf nations. If they refuse 100% US$ payment for crude oil, we will hear the death knell of the defacto PetroDollar standard. Eventually, look for payments of Arab oil, if not all OPEC oil, to be made in whatever China dictates their currency basket to be. Entire banking systems will be forced to adjust, with massive selling of USTBonds and accumulation of EuroBonds. This topic will be continued in the November Hat Trick Letter.

RESILIENT HUI MINING INDEX

The HUI index of precious metal mining stocks has been challenged in the last two weeks. It completed a breakout. The longer a price pattern remains confined in a bounded range, the more powerful is its breakout, the more enduring is its strength, the greater the attention garnered when it occurs. It is occurring. The two key moving averages are still rising. In the current week, notice the ‘bull hammer' pattern, characterized by the opening and closing price being well above intra-week price movement. The week is not over, so this is worth watching. Bull hammers are very bullish.

The HUI chart is showing resilience. We should see a minimum of a 90-point advance from the former broken resistance level at 380, within the next several months. The favorable autumn season is here. The leaves are falling and are beautifully colored in the northeast states.

Many smaller mining stocks have recovered most or all of their August painful hits. The trickle down will work its magic, from large caps to midsized stocks to smallcaps to microcaps. My favorites are the Canadian juniors, which have received for alert intrepid American investors a currency dividend. The loonie currency is above 103 amazingly. My forecast is for the Canadian Dollar to approach 120 and perhaps exceed it by mid-2008. Major challenges are coming.

REQUIEM FOR THE US DOLLAR

The Goldman Sachs plant as the new head of the Bank of Canada ensures the takeover of the Canadian banking system, the introduction of the newly inaugurated amero currency, and lost sovereignty for Canada . This is tragic. With a crippled US banking system, a faltering USEconomic system dependent upon housing, and a Mexican failed state in the making, my hopes for the viability of the amero currency are dim. This garbage regional currency is doomed from the start. Canada is a small economy with an absolutely gigantic treasure of natural resources. The relative size of the three economies bodes poorly for the amero. With 30 million population in Canada , 300 million in the Untied States, and 120 million in Mexico , Canada cannot pull the three-horse team running ahead of a bizarre stagecoach. Cheap Mexican labor, ample Canadian minerals & resources, even with a spiffy new network of corridor transportation lines, cannot comfortably mesh with US entities.

The lopsided imbalanced upside down corrupted mix of US elements, steered toward consumption not investment, large & powerful rather than efficient, directed by wrong priorities, dominated by corrupt Wall Street and aggressive military forces simply is bound to produce little on the positive, and much on the negative. This queer alliance will not stop gold or silver prices from rising to great heights. This queer alliance will not prevent the energy prices from rising either. The main policy behind the amero currency will be inflation, no different from the USDollar.

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By Jim Willie CB
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