Friday, September 10, 2010

Watch Out Below: Banks Raising Capital Means Stocks and Commodities Will Go Down Hard

A very interesting and plausible theory explains why stocks are being pumped and will come crashing hard. It's all in the enws today that Deutsche Bankhas gone down about 7% in Europe because it is raising some $11B in capital, thus causing dillution for shareholders. That's all fine and dandy. However, the real story may be that all banks will need to do the same. Yesterday it was reported that European banks need capital (see our post). Basel III is being mentioned for that.

In the U.S. the story is that it's the Volcker rule, which is forcing major banks to shut down their trading operations (JPM announced so, and all or most others will follow, story).

"The Volcker Rule empowered by the Dodd-Frank financial-overhaul law
effectively bans proprietary trading and principal transactions along with
private equity deal-making and other investing techniques that are used to
benefit "the house" -- read Wall Street banks".

Actually, these trading operations are not being shut down, they are being separated from the banks. Proprietary trading accounts for about 15% of banks' revenue. Moving this trading outside the banks per se will not solve any conflict of interest prblems. As Marketwatch's Kostigen points out:
"Good luck trying to figure out whether the bank front-runs client trades,
uses inside information to profit, or exploits some loophole in the law".

Anyway, it is happening. These new trading houses, which will be big, very big, will want to make lots of money. Bill Cara theorizes that the best way of doing that is by starting with stocks at low prices. Since they have the support of the major banks, who really control the market, stocks should be pushed lower.

Much lower, actually. Bill says:
Well now I’m telling you that these HB&B proprietary trading desks will
be looking to start at or closer to the bottom of the market cycle than the top
in order to make humungous profits for their investors who will be – you got it
– mostly Goldman Sachs & Co, JP Morgan et al, and friends and family. It's
also possible that HB&B sees a major collapse in equity and bond prices in
the next year and doesn't want to face the music in Congressional hearings,
noting that their prop trading desks had made gazillions as the market fell,
clipping their clients, including America's biggest pension funds, along the

Forex and Currency Chaos

Furthering the case for this scenario is the fact that during the 2007/2008 crisis, the Euro was much stronger than it is now. We know at that time there was a huge flight to safety, which caused the US dollar to rise.

Euro chart (we track all currency ETFs live here):

Even gold suffered in that period:

When the USD rises, stocks, commodities drop.

Shall this play out, in the months ahead, watch out below.

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