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December 14, 2015, 10:18 P.M. ET - From Barron's Daily Online

Bulls Beat Back Bears as Dow Gains 100 Points

By Ben Levisohn

Bulls managed to beat back the bears–for one day at least–as stocks bounced back a bit from last week’s selloff.

Reuters

The S&P 500 rose 0.5% to 2,021.94, after falling as much as 0.9% earlier today. The Dow Jones Industrial Average gained 103.29 points, or 0.6%, to 17,368.50, and the Nasdaq Composite advanced 0.4% to 4,952.23. The small-cap Russell 2000, however, sat out the rebound, and fell 0.7% to 1,115.86.

RBC’s Robert Sluymer writes that a short-term bounce could be developing ahead of the Federal Reserve’s rate-hike decision:

Short-term momentum indicators, tracking 2-4 week shifts, are moving toward oversold territory suggesting a trading low should develop in the coming days/week coincident with option expiry and this week’s Fed announcement. While it is early to definitively state short-term lows are in place, silver linings include major market indexes beginning to bounce from next support levels, notably the S&P from 1995 and the Dow Industrials from its 100-dma.

Wells Capital Management’s James Paulsen argues that no matter what the Fed does, the current bull market is “no spring chicken.” He explains:

The ultimate capacity of any bull market is of course a complicated calculation dependent on an unspecified and not readily accepted set of factors. For example, how much room is left for improvement in investor sentiment? Are most investors already fully invested in stocks or are they sitting on considerable cash balances? Are valuations reasonable or are they nearing historic highs? How competitive are alternative investment returns? Do policy officials still have room to implement supportive accommodative policies? How young is the corporate earnings cycle? Are company balance sheets strong? Does the economy still have room for improvement or are late cycle cost-push pressures evident?

Capacity utilization is a concept long used when judging the economic cycle. Concepts like the factory utilization rate, the labor unemployment rate and the economy’s output gap help in accessing the age of an economic recovery. In a similar fashion, this note calculates and examines a capacity utilization rate for the U.S. stock market. While no single indicator is ever definitive, based on its utilization rate, the contemporary bull market is no spring chicken…

Valuations may not be record setting, but they are fairly high. Falling bond yields, a primary catalyst for the bull market during the last 35 years is all but exhausted. Because the economy is now near full employment, additional improvements in the pace of economic growth will likely come only with broader cost-push pressures, higher inflation, increases in bond yields and greater pressure on profit margins and P/E valuations. Finally, the corporate profit recovery is well past its best for this cycle. Profit margins have no room to rise further and emerging pressures may erode margins thereby largely offsetting any material improvements in sales performance…

At best, the major factors underlying the stock market will simply maintain their respective lofty hospitable levels. Less optimistically, some of the foundations for the current bull market may begin to weaken. Consequently, investors should adopt a more conservative outlook (if not yet bearish) for a stock market exhibiting the highest capacity utilization rate of the post-war era.

Don’t you wish he’d just say sell?

New Year, New Bank Failures

In 2010, we witnessed 157 banks closed by the FDIC. They were either taken over by stronger hands or liquidated and depositors were given back their deposits. 

On this first Friday of the New Year, only two banks were shut down. According to the BlogSpot the Bank Blog: 

  “The "honor" of the first bank to fail in 2011 belongs to First Commercial Bank of Florida based in Orlando. …It had approximately $598.5 million in total assets and $529.6 million in total deposits was closed. First Southern Bank of Boca Raton, FL has agreed to assume all deposits and acquired most of the assets. In addition, they have entered into a loss sharing agreement with the FDIC.

The second bank to fail this week is Legacy Bank of Scottsdale, AZ. … Legacy Bank had approximately $150.6 million in total assets and $125.9 million in total deposits was closed. It was acquired by Enterprise Bank & Trust of St. Louis, MO raising their asset level to over $2.5 billion, a roughly 6% increase.” 

Below are several links to different interactive maps of bank closures: an WSJ interactive map of the banking crisis since 2008, a version by Bankrate.com, then, my personal favorite, Portal Seven, and finally Bank info Security’s Failed Banks and Credit Union (24 CU’s shuffled off this mortal coil in 2010) interactive maps. 

WSJ

http://graphicsweb.wsj.com/documents/Failed-US-Banks.html

Bankrate

http://www.bankrate.com/finance/savings/map-of-failed-banks.aspx

Portal Seven

http://portalseven.com/banks/Failed_Banks_Map_2011.jsp

Bank info Security

http://www.bankinfosecurity.com/articles.php?art_id=2092 

Why the redundancy? It’s called research and it protects analysts and analysis from becoming lazy and eaten alive by “Black Swans”. Besides, variety is the spice of life. 

The foremost question for 2011 is which group will hit the 100 institution finish line first; the number of FDIC bank closures or the number of municipalities to default on bond payments or file for reorganization under Chapter 9? 

For those of you unfamiliar with Chapter 9, Title 11, of the United States Code, the following is a short description taken from Wikipedia: 

“Chapter 9, Title 11 of the United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities and assists them in the restructuring of debts. Most famously, Chapter 9 was used by Orange County, California in 1994 to adjust its debts. 

Previous to the creation of Chapter 9 bankruptcy, the only remedy when a municipality was unable to pay its creditors was for the creditors to pursue an action of mandamus, and compel the municipality to raise taxes. During the Great Depression, this approach proved impossible, so in 1934, the Bankruptcy Act was amended to extend to municipalities.^[1][2] 

The 1934 Amendment was declared unconstitutional in Ashton v. Cameron County Water District,;^[3] however, a similar act was passed again by Congress in 1937 and codified as Chapter X of the Bankruptcy Act (later redesignated as Chapter IX).^[4] Chapter IX was largely unchanged until it was amended in 1976 in response to New York City's financial crisis.^[5] The changes made in 1976 were adopted nearly identically in the modern 1978 Bankruptcy Code as Chapter 9.” 

Therefore, if the 112^th Congress refuses to assist states this year, their “tough love” approach may include modifying Chapter 9, to allow states to reorganize, too. 

Katy-bar-the-door, if foreign creditors of the U.S. ever decide to perform a “tough love” credit analysis of America’s annual deficit spending over the last 10 years by both political parties. 

The U.S. profile worsens with ongoing maintenance costs of rising poverty rates and persistently high unemployment, mutating employment characteristics and opportunities, an aging population, exploding medical costs and 50 million uninsured citizens (while dead birds fall from the sky and dead fish wash ashore, mystifying officials); and a slowly crumpling, complex, and very expensive infrastructure. 

As disturbing as our internal footprint is, our annual trillion dollar expenditure for homeland security and open-ended global military commitments, housing over 800 active operating bases, rests precariously upon on stagnant personal incomes and falling tax receipts. The Fed Chairman, Ben Bernanke, instructs America to be patient; jobs will return in four or five years. 

Educational test scores, a mighty predictive tool forecasting future individual or collective wealth, explicitly from the quickest growing population segment, are out of synch with societal needs. 

Our soured social and political discourse and extreme political recklessness is everywhere in the air and on display before our allies, trading partners, and foreign lenders of last resort to see. 

Let’s hope the benefactors of our cash flows prefers their biggest borrower and financial liability becoming this new, edgy, erratic, 21^stcentury emerging America economy versus the former, stable, predictable, 20^th century American middle class.

A Brief Weekly Review and Outlook

Last week was a continuation of an exuberant market during earnings season and a flailing economy complete with bad housing data and seven additional FDIC bank closings. The bulls argue corporate balance sheets while bears focus on the economic data. So, which is safer; driving looking into the rear view mirror or the windshield?

There is near unanimous agreement in the market that deflation has defeated inflation. Unanimous consensus always makes me nervous. Looking around the US, deflation is prominent, with all things real estate. However, US real estate is losing its impact, month by month, on the global economy.

What cannot be timed is when global growth, and the inflation that comes with it, overrides the drag of American real estate.

The amazing Treasury bond market is like sleeping with a very large snake; hopefully, you wake up first. The bond market is pricing in a near depression, perhaps, while the stock market is celebrating business as usual. Or, the rest of the world is madly purchasing US debt, thereby, driving down yields, as there is no safe alternative to treasuries, at the moment. The wild card is government intervention – or the lack of it – from an economic perspective.

On the other hand, the municipal bond market continues to offer a much better yield, although, 41 out of 50 states are insolvent, and all five Gulf States are exposed to loss of revenue and clean up expenses from the BP oil spill.

Gold was up $1 buck last week. Gold is still outperforming stocks for the year.

The week ahead offers more corporate earnings reports and several important economic reports.