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Tuesday, February 2, 2010

part 2

4. With B. Frank the biggest bank lobbyists ( Dodd, Shelby and Kojorsky) sit in center stage positions within the committee's are aiming to play the bad cops for the Volcker rule undermining and diluting it.


So Much For The Volcker Plan: Shelby, Dodd And Kanjorsky All But Kill The Prop Ban Proposal

Pulling Volcker out of the closet following the Massachusetts debacle was a useful diversion: the whole prop trading ban seemed almost credible. And now that there are no immediate public votes in the future, it is safe to put Volcker back where he belongs, but quietly, lest the morts and general peasantry think that Obama is all bluster and no actions. Alas, if the latest development in the ongoing Wall Street "regulatory" saga, as reported by the FT is any indication, the prop trading plan, as proposed by Volcker, is now dead. This time, the last chance to put the financial system on some stable footing comes courtesy of Dick Shelby, Chris Dodd and Paul Kanjorski.

A proposal by former Federal Reserve Chairman Paul Volcker to limit bank’s proprietary trading will be either be dropped or significantly modified in the Senate, lawmakers and staffers told dealReporter.

Senate Banking Committee ranking member Richard Shelby (R-AL) said he opposes the so-called Volcker rule and the Obama administration’s call to levy a USD 90bn tax on banks. His comments come as House Financial Services Committee Chairman Barney Frank (D-MA) predicted the proposals outlined by President Obama could be law within six months.

Speaking to this news service on Thursday, Shelby said if Democrats push forward with the proposals they risk unravelling much of the bipartisan support already reached regarding the passage of financial regulatory reform in the Senate. Shelby said that the Obama administration risks losing Republican support for the bill if they begin to “politicise” the issue.

In retrospect, this is pretty smart of Obama - the prop ban, which was badly conceived, as its actual implementation would likely result in the spin offs of many of Wall Street's most profitable segments, will be buried, and the blame will be put on the republicans. One wonders just whose special interests Richard Shelby is protecting this time around.

And yet, as always, critical to the killing of Volcker's idea, will be none other than Chris Dodd, who is somehow still in office after announcing he is retiring, having the support of about 5 voters in his district.

A Dodd staffer said the senator is likely to quietly drop or modify many of the recommendations in the Volcker rule to ensure Republican support for regulatory reform.

“Chris is retiring so he wants to end his career with an important regulatory reform bill and he wants to make the bill bipartisan,” the staffer said. “He is not going to risk bipartisan support to make the White House happy.”

The Democratic staffer said there is an ongoing debate among members of the banking committee about whether the Volcker rule would effectively push risk out of regulated markets and thus ultimately create more risk to the financial system.

Dodd told this news service on Thursday that the banking committee will begin mark-up of the financial regulatory bill in the near future and his committee will hold a committee meeting on the Volcker Amendment on Tuesday with Volcker and a follow-up hearing on Thursday.

Lastly it seems that Kanjorski is also set on killing the prop ban:

House Financial Services Subcommittee Chairman Paul Kanjorski told this news service he is only 80% to 85% in agreement with the Volcker rule and that many issues raised by Volcker are already included in his amendment passed by the House.

Warner blamed much of the political storm connected to regulatory reform on bankers. He called Goldman Sachs’s proposal to lend USD 500m to small businesses over a five-year period derisory, and said banks need to come out in front of the issue regarding compensation.

So there you have it: Wall Street, after getting bailed out by America, is now back to telling America what is in its own best interest; if the cost is a few corrupt politicians, so be it: we are certain that the trio above was easily purchased with less than one day of Goldman's record trading days during Q4. In the meantime, we continue cruising along, pretending that anything has changed, except that this time open wealth transfer from taxpayers to investment bankers is not only legal and allowed, it is in fact encouraged.

5. More charts to the technical situation of the market from another perspective but confirming my observations.


Despite the recent decline, the Market Climate remains characterized by overvalued, (intermediate-term) overbought, overbullish and rising-yield conditions. Having broken an uptrend that has been largely intact since March, as well as a sideways range of support established over the past few months, the natural tendency of the market after such a break is to recover back to the point of prior support, so we should not be surprised if the S&P 500 enjoys a sharp recovery rally modestly above the 1100 level, even if the recent correction has further to go. If we observe a “recovery rally” of poor quality from the current short-term oversold conditions, we would be inclined to move to aggressively toward our “Safe Portfolio.” Importantly, recent market action has historically been associated with a moderate continuation of upward stock market progress and a tendency to make successive but very marginal new highs, typically followed by abrupt and often severe market losses within a time window of about 10-12 weeks.

The uptrend since the March low can be seen on the weekly chart below. Of equal importance is that the market’s Price Momentum is very overbought and rolling over through its 10 EMA.

The market’s “sideways range of support” is also shown on the daily chart below. You can clearly see the break below 1100, which should now become resistance.

Internal weakness is also confirmed by:

A. Percent of stocks above their 200 DMA rolling over;

B. MACD has stalled and clearly rolled over;

C. Unfortunately, we are a long way from support

Portfolio risk is elevated as the “market call” drives all asset prices. Coincidentally, deterioration can be seen across asset classes year-to-date:

A. Credit spreads ticked up from extremely low levels given the macroeconomic risks dominating the investment landscape today;

B. Dollar strength may be interpreted as a resurgence of deflationary pressures. Similar “Red-Flag Reversal” (MACD crossover) was last seen in early 2008;

C. Dollar strength predominantly expressed through a weakening Euro; More on this and other sovereign risks in the Broyhill Letter;

The Tape moved from bullish to neutral – has cracks, but isn’t broken yet. Given the massive underlying risks from a macro perspective, it is prudent to leave the last ten percent for the next guy.

Short-term timing model is also neutral now. Watch closely for a “sell” signal, as this would mark the first from the March lows. Percent of stocks above their 10-Week MA and 40-Week MA shows weakness across our Global Composite. Percent of new highs versus new lows is approaching it’s first ‘lower-low’ in almost a year. This is a major reversal of a rising trend in new highs since the October 2008 “panic lows.”

Money supply growth is declining, perhaps as deflationary forces are taking hold again. Last year’s surge in the monetary base drove the broad based reflation in risk assets. Investors should ask themselves, what will support stocks going forward?

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