If Breadth Gets Any Narrower

You Can Thread A Needle With It

The signals keep piling up. Like usual, a market that should be heading lower, much lower, keeps moving higher. The question that must be asked is twofold; (1) are there any other stocks to buy other than the mega caps and (2) what will happen when it all “hits the fan” and stops with everyone deciding to all sell at the same time?

I’ve been here before and the cracks are getting larger. The dam is holding up so far but 2nd quarter earnings and forward statements are on the way. S&P 500 EPS growth for the 2nd quarter of 2023 is forecasted to come in at -7.2%, the lowest rate in nearly three years and potentially the third consecutive quarter of negative earnings growth. It looks like the U.S. Dollar is finally calling it quits. That’s good for me as on my 4th entry going long the Yen I finally hit “pay dirt”. Remember, I warned you I’m usually a little early. I’m looking to short Cocoa as well using the same long term technicals I used to buy Sugar and Rice. Haven’t initiated the trade but here’s the reason why all in a single chart; thanks Barchart. Give Barchart a try, just “click here”; get a trial for free at no risk. It just might be the best ‘click’ you’ve ever made.

Enough of what I’m doing. There was an indicator and a couple articles about banks that caught my attention recently. After doing my own due diligence my interest grew. Let’s take a look at “LERI” to start with as it’s signaling that the “end is near”.

The Late Earnings Report Index “LERI” Approaches Pandemic Levels

Just what is the “LERI”? The Late Earnings Report Index tracks outlier earnings date changes among publicly traded companies with market capitalizations of $250M and higher. It’s baseline reading is 100, anything higher indicates companies are feeling uncertain about their current and short-term prospects. A LERI reading under 100 suggests companies feel they have a pretty good crystal ball for the near term.

The official 2nd quarter LERI is calculated after the big banks report Friday, July 14th. The preliminary LERI stands at 155, its highest reading since the COVID pandemic. As of July 10th, there were 31 late outliers and 18 early outliers. The number of late outliers typically rises as earnings hit indicating that the LERI is ready to go higher.

CEO Confidence published by the Conference Board confirms this pessimism from corporate America. The May 4th report came in at 42, down a tad from the 1st quarter 43 number. Anything below 50 means CEOs are pessimistic about what’s ahead in the economy.​ Who are going to listen to, the Robinhood “newbies” or the CEOs? Here’s what’s bothering me about the banks.

Banks As We Know Them Are Changing

Rising interest rates hurt banks in two ways; the losses on the securities held by banks increase and the depositors pull cash from accounts. It’s like squeezing a tube of tooth paste from both sides. There’s only so many more “pickle ball” courts that we need so commercial real estate losses are going to soar. The “big boys” can handle it; midsized institutions not so well; Jamie Dimon’s not perched at the front of the “clean up” line any more.

Nonetheless, you’re going to have a massive wave of M&A between the smaller banks because they need to get bigger,. There’s just too many banks operating in the states. It’s time to clean house; today’s technology is capable of replacing middle managers. That could serve to raise unemployment. We just have too many banks.

Back in 2008 it was the “big banks” that needed to be bailed out. Smaller banks were viewed as safer and skirted by with less federal oversight. Until the failures at First Republic and SVB, they traded at premiums to their bigger peers. While less complex they were not necessarily less risky. It’s time to combine or die, eh?”

Unlike in 2008, regulators, particularly those keeping their eyes on the $100 billion to $250 billion asset range, are knocking at the corporate office doors. Costs to handle these investigations are in the pipeline and that’s going to further depress returns and pressure earnings. Higher fixed costs require greater scale, regardless of the industry you are in. Banks have to get bigger and quickly; half of the country’s banks will likely be swallowed by competitors in the next decade if not sooner. From my perspective it’s about time.

Yellen is open to bank mergers as is the Justice Department. Bigger banks have more resources to handle upcoming regulations and technology demands but they realize it doesn’t make sense to use their “currency” to acquire what’s going to come their way regardless of what transpires. Distress for one bank means opportunity for another.

I remember when small savings and loans were organized to go public in the 1980s, one after another. That didn’t go to well and The Resolution Trust was established to handle the carnage. I wonder what they’re going to call the next institution that’s put in place to handle what’s in store for the middle market bank debacle that’s about to unfold. I can think of a few names but again, we’ve caused a problem out of thin air. So much for competition. Maybe they’ll call it the Senator Warren Powwow. After all she’ll probably be the only one opposed to the logical outcome of what’s coming and the “Warren Commission” has already been used for one tragedy.

It’s been busy down here is Texas. I’m drafting courses in Futures, Options, ETFs and thanks to you many more. I’m pretty much working around the clock to take what’s “in my head” and put it “between your ears”. A few of the courses should be on the table by the end of July, maybe sooner. I’ve learned how these “newfangled editors”. Now all I have to do is get a better tan so I look good in the videos.

I’m just a “young” 68 years old looking to help you become the best damn investor or trader you can possibly be. Everyone learns at their own pace. If you pick everything up the first time through, great but if not email me at david@thetickeredu.com so we can further help. Again, let me know what you want to learn, I’m all ears.

I have to go back to an old favorite for today’s post. The higher markets go “for no reason”, the faster and harder they fall. Who knows, these “newbie” traders might interpret negative earnings and lowered forecasts with interest rates coming down. I’m looking for a “wick’ in the Russell 2000 to get short again. How about you? In the interim enjoy R.E.M.’s “It's The End Of The World As We Know It (And I Feel Fine)”.