Financial Crisis Mode: Get Ready To Short The Banks, Again (XLF, FAS, FAZ, SKF, C, BAC, MS)
Sara Nunnally: It is clear the U.S. economy is “too big to fail.” But what happens when that is the only option? You won’t like the answer.
There’s an idea out there that some folks just aren’t paying their fair share… And that if they did, the economy would be able to right itself, and the good ol’ USofA would be the land of milk and honey once again.
Ironically, this argument is used on both sides of the aisle… and across classes. The poor and lower middle class think the rich get out of paying taxes through special loopholes their personal accountants find for them. And the rich and upper middle class think the poor don’t pay taxes because of all the government handouts in the form of tax breaks.
The simple truth is, each of our “fair shares” isn’t enough to put our economy back on track.
What we desperately need to do is stop blaming each other for the economic crisis.
That blame should fall squarely on the shoulders of inept Washington policy makers and greedy Wall Street fat cats.
Let me share with you some math from our friends at EverBank:
The total National Assets are $83.3 Trillion. The total U.S. Unfunded Liabilities are $118.5 Trillion. If each taxpayer were to “ante up” and give the Gov’t money to pay off our Unfunded Liabilities, each taxpayer would have to put up $1,045,026.00. A million dollars!
And here’s something else… The combined wealth of the 40 richest people on Earth is $1.1 trillion. At the same time, hedge funds saw $16 billion in net new capital from investors, which contributed to a $130 billion pop in assets for the first quarter of 2012. That means hedge funds are holding a record $2.13 trillion in assets.
As much as that is, it doesn’t amount to much. Not when there are hundreds of trillions of liabilities to pay off.
And not when another economic shock could be headed our way. We’ve seen a couple of banks report lukewarm earnings this week. Bank of America (NYSE:BAC) saw earnings fall to $653 billion from $2 billion a year ago. Morgan Stanley (NYSE:MS) actually swung to a loss.
Reports are saying that these two banks saw these drops in profits because of one-time accounting charges or valuations.
In Morgan Stanley’s case, the loss was from accounting charges related to the company’s credit spreads. For Bank of America, the accounting expenses stemmed from how its debt is valued.
I think these are the canaries in the coal mines, folks.
Want some more proof?
From the International Herald Tribune:
BlackRock, the giant money manager, said it would have no choice but to shift some of its business away from certain Wall Street firms if Moody’s Investors Service went ahead with its threat to downgrade some of the country’s biggest banks.
Now, of course, nobody’s naming names, but word around the water cooler is that Morgan Stanley is probably the most vulnerable, along with Citigroup (NYSE:C) and Bank of America.
Three big banks with less-than-stellar earnings reports, and all due to issues with debt and credit.
This should be telling you something.
Moody’s reports that some big banks are “exposed to large and rapidly-changing risk positions that expose these firms and their creditors to unexpected, sometimes outsized losses.”
This smells of MF Global… Remember them? The broker that made huge multibillion-dollar bets in the European bond market and lost hundreds of millions of dollars’ worth of customer money? Yeah, that’s part of it.
But it also smells of early financial crisis mode. The unwinding of bad bank investments sent shockwaves through the global financial system. I don’t blame Moody’s for being cautious.
We all should be.
As reported by Bloomberg earlier this week, the top five banks held $8.5 trillion in assets at the end of last year. That’s equal to 56% of the U.S. economy!
Wanna guess how much the top-five banks represented before the financial crisis? 43%.
That is a very scary number… because the U.S. government can’t bail them all out, should it come to it.
It’s like a juggling act. There are a couple of guys in the middle of the circus ring tossing bowling pins back and forth. And then they add another pin, and another. At first, it looks like everything’s under control. These guys are experts, right?
But then they add another, and another… Pretty soon, the jugglers’ arms are just blurs, moving so fast that they barely have time to catch a pin before another is being hurled their way.
We’re just waiting for their arms to get tired for the whole game to collapse.
I told you last Friday to get ready to short some banks. It looks like the setup is already in place…
Related: Direxion Daily Financial Bull 3X Shares ETF (NYSEARCA:FAS), ProShares UltraShort Financials ETF (NYSEARCA:SKF), Financial Select Sector SPDR ETF (NYSEARCA:XLF), Direxion Daily Financial Bear 3X Shares ETF (NYSEARCA:FAZ).
As Senior Research Director, global correspondent and co-editor of Smart Investing Daily, Sara has traveled all over the world in search of the best investment opportunities to recommend to her readers, be they in developed economies like France and Italy, in emerging markets like the Czech Republic and Poland, or in frontier terrain like Vietnam and Morocco. Her unique “holistic” approach of boots-on-the-ground research has given her an edge in today’s financial marketplace as she searches for the next investment opportunities in hot sectors like alternative energy, currency markets and commodities. Sara Nunnally’s diverse background includes studies in history, computer science, literature and financial research. She has appeared on news media such as Forbes on Fox, Fox News Live, Bloomberg and CNBC’s Squawk Box, as well as numerous radio shows around the country.
Article brought to you by Taipan Publishing Group, www.taipanpublishinggroup.com.