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The Bull Is Winning at the End of Round Five


Can the Bear deliver a knockout punch?

Editor's Note: This article was written by Richard Suttmeier, chief market strategist at, which is a fundamentally-based quant research firm in Princeton, New Jersey, that covers more than 5,000 stocks every day.

The FDIC closes
Horizon Bank of Bellingham, Washington

Horizon Bank (HRZB) becomes the first failure of 2010, and it was a publicly traded community bank on the ValuEngine List of Problem Banks. The bank, with $1.3 billion in assets, cost the Deposit Insurance Fund $539.1 million with extreme overexposures to C&D and CRE loans -- 1396% C&D and 3003% CRE.

Assuming that the FDIC Deposit Insurance Fund was replenished with $45 billion at the end of 2009, the fund now has a balance of $25.8 billion, which I say will be depleted by the second half of 2010.

To review the regulatory guidelines: In the fall of 2005, the Federal Reserve, US Treasury, and the Federal Deposit Insurance Corporation (FDIC) realized that community and regional banks were loaning funds to the housing and real-estate markets at a pace above what these regulators thought as prudent. Guidelines were floated at the end of 2005, and formalized at the end of 2006.

The guidelines state that if loans for construction and land development are 100% or more of risk-based capital, and/or loans for construction, land development, and loans secured by multifamily and commercial property are 300% or more of risk-based capital, the institution has loan concentrations above prudent levels, and should employ heightened risk management practices. These guidelines have been ignored, which intensified "The Great Credit Crunch."

This lack of regulation by the FDIC resulted in 140 bank failures in 2009 and 166 since the end of 2007.

Consumers are paying down debt by record amounts

Total borrowing dropped by $17.5 billion in November as Americans borrowed less for the 10th consecutive month. This is a clear sign that it will be a long time before consumers will support the US economy beyond the muted success of the holiday season.

Consumer spending accounts for 70% of total economic activity, and November's drop in consumer credit was the biggest in dollar terms since records began in 1943. This statistic excludes home loans and home equity loans, and thus covers borrowing not secured by real estate. Credit card borrowing fell for the 14th consecutive month, also a record. Consumer Credit now totals $2.46 trillion.

My fearless prediction of the week: Trading ranges should continue another week with the 10-Year between 3.868 and 3.675, gold should trade between $1115 and $1167, crude oil should stay above $77.05, and the Dollar Index should stay below 80.23. This will keep the Dow Industrial Average between 10,379 and 10,997. We had the Breakout, we await the catalyst for the Fake-Out.

Source: Thomson / Reuters

The Dow continues to move higher in a continuation of 2009. This puts the Bull ahead of the Bear in Title Fight after the first five days on points. I expect this to remain the case this week as the Bull and Bear return jabs. I don't expect a TKO against the Bear, but there needs to be a bearish catalyst for the Bear to score a knockout. That catalyst would cause a weekly close below my annual support at 10,379.

ValuEngine shows 10 of 11 sectors overvalued, which is combined with overbought technicals.

The dollar is the wildcard as a weekly close above 80.23 on the Dollar Index ends the carry trade. This is why basic industries are 21.4% overvalued and energy is 19.6% overvalued. The cheapest sector is health care but only by 4.4%.

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No positions in stocks mentioned.

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