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Leaders and Laggards in the US Capital Markets

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The Dow lags its January high, while NASDAQ, Transports, and Russell 2000 power to new cycle highs.

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


The yield on the 10-Year is cheaper than my semiannual pivot at 3.675, which is a sign that the increasing sizes of the US Treasury auctions are trumping the risk aversion. In addition, the coupon curve is starting to flatten in anticipation that the FOMC may signal a change in its wording on interest rates as early as at the end of Wednesday's meeting. Removing "extended period" will build a consensus that raising rates may occur at the end of June.


Source: Thomson / Reuters

The re-inflating of the gold bubble keeps hitting a wall of resistance that extends from $1115.2 up to $1195.4. Crude oil has a tough time getting back to its January high of $83.95. Meanwhile the euro has stabilized above 1.34. Higher gasoline prices are a tax on consumers on Main Street and the cause is commodity speculation not legitimate supply and demand. The euro rebound is short, covering on speculation that the dollar has bottomed.


Source: Thomson / Reuters

The NASDAQ, Dow Transports, and Russell 2000 are at new 2010 highs, while the Dow Jones Industrial Average lags its January high of 10,730. The Dow is above my annual pivot at 10,379 with annual and semiannual resistances at 11,235 and 11,442. These strong resistances are the reason why I predict 8,500 before 11,500, particularly with an extremely overbought daily chart. My call is supported by having nine of 11 sectors overvalued according to ValuEngine.


Source: Thomson / Reuters

The Housing Sector Index (HGX) is below its September 2009 high, while the America's Community Bankers Index (ABAQ) and Regional Banking Index (BKX) are at new 52-week highs and are extremely overbought, being up 10.2% and 18.1% respectively year-to-date. These gains aren't justified by the fourth-quarter FDIC Quarterly Banking Profile. Investors in this strategy are playing Russian roulette with their investment dollars.


Source: Thomson / Reuters


Source: Thomson / Reuters


Source: Thomson / Reuters

The Emerging Markets Index Fund (EEM) and the China 25 Fund (FXI) have rebounded but remain down year-to-date by 0.3% and 2.4% respectively. The FXI has become extremely overbought.


Source: Thomson / Reuters

Bank Failure Friday started on Thursday. There were four failures, bringing the total for 2010 to 30 banks closed. In 2008 there were just 25 bank failures. In 2009 there was another 140. The total since "The Great Credit Crunch" that began at the end of 2007 is now 195, on the way to 150 to 200 this year and 500 to 800 by the end of 2012 into 2013.

Most economists and strategist say that closing small banks is no big deal with little impact on the economy and the markets. So far this year this "leaky faucet" in the US economy has cost the FDIC Deposit Insurance Fund $4.9 billion with the DIF now underwater by $25.8 billion.

This is a big deal as small businesses are the engine of US economic growth. Most small businesses don't want to borrow because of economic uncertainties. Those that want a loan can't get one because 4,172 banks, or 52%, of all FDIC-insured financial institutions have loaned more than 80% of their loan commitments. Of these, 1,406 have a loan commitment pipeline that's 100% funded, which is 17.5% of all banks. That's too many "leaky faucets" that will eventually have to start to drain the FDIC's $500 billion line of credit with the US Treasury.

All four of last week's bank failures were private banks extremely overexposed to C&D and CRE loans with C&D to risk-based capital ratios between 243% and 520%, and CRE to risk-based capital ratios between 1226% and 6035% with pipelines of 82.5% to 97.6%. The ignored regulatory guidelines are 100% and 300% with a normal or healthy pipeline of 60%.
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No positions in stocks mentioned.
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