Market Report for Monday, August 27, 2007

Market Report: Will Washington Continue to Play the Enabler or is a Little Painful Discipline on the Way?

Huh? What? Who in the world would be so foolish as to even suggest such a thing?

Heck, this morning the National Association of Business Economics has announced that its members fear a continuing bank crisis more than Osama Bin Laden and all his very angry cousins. As per its latest poll, biz guys would prefer to gas up their Escalades twice in one week than even attempt to find some loose capital to borrow.

NABE president Carl Tannebaum goes so far as to claim that “financial market turmoil has shifted the focus away from terrorism and toward subprime and other credit problems as the most important near-term threats to the U.S. economy.”

Are such fears overblown? Usually. In fact, one could almost see this as a sort of “Sports Illustrated jinx.” By the time most of NABE’s membership is worried about something, it’s probably close to peaked.

Still, I snickered a bit when the Financial Times featured a short squib on its Web site this Sunday claiming that “commercial banks with big balance sheets are poised for a resurgence.” Its trading theorem? Now that the whole rest of the biz is coming up short, the big banks can step in and take over lending to big biz. Even better, the repeal of the Glass-Steagall Act back in 1999 will clear the way for these guys to vastly expand their offerings.

Yes, the Fed has stepped in repeatedly (as have key European Central banks) over the past few weeks to save these institutions from themselves. And while it has yet to be determined whether or not it is a good thing, we are most likely entering into a phase of looser interest rates.

But I have been reading some of the notes coming out of the Fed and various congressional banking committees (something that perhaps those who are suggesting buying banks have yet to do), and there seems to be a great deal of regret over that aforementioned repeal, and the inclination to write enough new rules and regulations to strangle bankers of all stripes for years to come.

Those investors who have thought on this more strenuously are making their discomfort felt, with all that returning capital of the past 10 days suddenly finding itself stalled at the top of the falling trend.

We technicians have a way of describing this sort of hauling back on the reins. In the parlance of Japanese candlesticks, it is called a “Harami Cross.” A perusal of Bank of America (BAC: NY&SE)’s weekly chart shows this formation quite clearly; with one week showing a strong 6.52% advance while the next shows all sorts of action without any real gain or loss.

In plain English, the rising trend has run out of steam leaving formerly bullish investors pondering just why they paid so much for a dubious asset, and just how they are going to unwind this unwise position. (Traders are usually less sanguine and are simply wondering how fast they should run for the exits.)

My call for BAC shares in particular? A drop back to the recent lows at $46.52 is almost a lock. At that point, we shall have to see how much of a friend the big banks have on Capitol Hill and C St. Should Washington get stiff with them, a drop to $40.93 is not out of the question. As always, select deployment of middated puts could convert this 20% to a 120% gain.