Market Rally: Why The Banks Are Running The Show (FAS, FAZ, SKF, XLF, BAC, JPM)

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June 20, 2012 11:34am NYSE:FAS NYSE:FAZ

Shah Gilani: The markets are rallying, again. Will this time be different? Or is this just another head fake?  The truth is the current rally is not surprising given what’s coming out of the G20 meeting, what’s likely to come out of the Fed’s Open Market


Committee meeting today and Jamie Dimon’s Congressional testimony yesterday.

But things aren’t what they appear to be. What’s happening behind the scenes is far more important than what’s being said publicly.

So, investors better understand what the real game is here and how to play it.

To do it, we need to work backwards.

Jamie Dimon, CEO of JPMorgan Chase (NYSE:JPM), has repeatedly said under oath that his bank isn’t too big to fail.

That fact that he’s implying it’s okay to let a bank the size of JPMorgan collapse and enter bankruptcy in the event of “a moon hitting the earth” (admittedly unlikely) or potentially huge losses from something like bad bets on derivatives, is a flat out lie.

Of course, that lie can’t be proven unless the bank was to actually fail, so it’s unlikely that Mr. Dimon could be brought up on perjury charges. But it’s still a flat out lie.

JPMorgan Chase and all the big U.S. banks are too big to fail.

And in that lot we can also cast all of Europe’s big “universal” banks. They’re all too big to fail in a very real sense because they are all interconnected.

Between the crossover of portfolio holdings, interbank lending mechanisms, derivatives bets and counterparty exposure, all of the big banks suffer from real contagion calamity concerns.

As a result, the breakdown of trust anywhere impacts trustworthiness of banks everywhere.

The fact that many banks have gotten bigger since the financial crisis is no accident.

Precisely because they are too big to fail, by getting bigger still they’ve become more powerful than regulatory bodies (separately and collectively) and political entities, including Congress, parliaments, sovereign leaders and central banks, which are now political arms of the banks themselves.

More Money, More Money, More Money

And speaking of central banks, let’s move on to the Federal Open Market Committee. The two-day FOMC meeting ends today and we’re expected to get a statement from the Fed on their deliberations.

One thing is for sure. Whether they opt for more quantitative easing, a further flattening of the yield curve with more Operation Twist, or a statement that they stand ready to do whatever they have to do, the bottom line is they’re going to pump more money into banks at some point.

That’s not the same thing as saying they’re going to pump money into the economy.

The Fed doesn’t pump money directly into the economy anywhere other than through their favorite conduit. Guess who? Their singular constituents, the banks.

The markets have been rallying on exactly these prospects — more money flooding into banks.

And as far as the G20 in Mexico, their concerted rhetoric is designed to assuage the free markets’ fears that markets will be freed to fail.

In other words, the world’s leaders, along with their finance ministers, and with a nod from central bankers shaded in the dark halls of Cabo, are telling the world that they’re working together to stem economic stagnation and help heal Europe’s ongoing crisis.

Translation: more money, more money, more money for the banks — all of them.

That’s the game. It’s been the game. It’s better known as “extend and pretend.”

Extend more money, more loans, extend maturities and repayment terms, extend austerity demands and pretend that growth will eventually be financed by means of all that money that the banks are spilling out into the global economy and “this too shall pass.”

What’s sickening is that there are banks and economies, particularly in Europe, that are deathly ill.

The Banks are Running the Show

And instead of letting banks and even sovereign nations go belly-up and pay the price for greedily overleveraging themselves, the very same bankers who fed the monsters of mayhem are being given more money to keep feeding them. Meanwhile everyone else is stuck with a diet of austerity.

You can’t have it both ways. But, the banks are running the show. So, as long as they can keep their lifelines open, as long as investors believe that throwing more money on the fire to put it out is the answer, the more asset prices will rally.

That’s what’s happening. That’s why we’re rallying.

So, what’s the game? Well, it’s follow the leaders first, then get out of the way second.

This rally looks no different than any other rally in recent memory. It started as a short-covering rally and is continuing on the prospect of more easy money floating asset prices higher in the short run.

Why? Because higher asset prices quell the fear of deflation. And its deflation — not inflation — that is the major concern facing the global economy once again.

Will it work this time? Is this time different?

No….But in the meantime: If you like follow the leader, you should be buying some stocks here, or at least you should have already bought stocks a few weeks ago.

But if you don’t want your head handed to you when the top blows off, you better be ratcheting up your stops and adding downside protection on every big up move.

Of course I could be wrong. After all, banks may have become our new churches. Yeah, right.

Related: Direxion Daily Financial Bull 3X Shares (NYSEARCA:FAS), ProShares UltraShort Financials (NYSEARCA:SKF), Direxion Daily Financial Bear 3X Shares (NYSEARCA:FAZ), Financial Select Sector SPDR ETF (NYSEARCA:XLF), Bank of America (NYSE:BAC).

Written By Shah Gilani From Money Morning

Shah Gilani is the editor of the highly successful trading research service, The Capital Wave Forecast, and a contributing editor to both Money Morning and The Money Map Report.  He is considered one of the world’s foremost experts on the credit crisis. His published open letters to the White House, Congress and U.S. Treasury secretaries have outlined detailed alternative policy options  that have been lauded by academics and legislators.

His experience and knowledge uniquely qualify him as an expert.  Gilani ran his first hedge fund in 1982 from his seat on the floor of  the Chicago Board of Options Exchange. When the OEX  (options on the Standard & Poor’s 100) began trading on March 11,  1983, Gilani was working in the pit as a market maker, and along with other traders popularized what later became known as the VIX (volatility  index). He left Chicago to run the futures and options division of the  British banking giant Lloyds TSB. Gilani went on to  originate and run a packaged fixed-income trading desk for Roosevelt  & Cross Inc., an old line New York boutique bond firm, and  established that company’s listed and OTC trading desks. Gilani started  another hedge fund in 1999, which he ran until 2003, when he retired to develop land holdings with partners.


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