August 13, 2014

Section 165 and TBTF + Knowing When Not to Trade

FederalreserveAccording to the Dodd-Frank Act under section 165 banks are required to submit annual reports to the FED that specify each banks plan for “rapid and orderly resolution in the event of material financial distress of failure.”  Yep – you read correctly – those same banks that just a short 5 years ago took the global economies to the brink of collapse are to report to the FED – the same central bank that liquefied and brought said global economies from the brink of collapse by injecting more capital than as the old saying goes, “Carter has pills.”

tbtf banksI’m sure many of you are well aware that US banks produced net profits in the second quarter of 2014 of $40.24 billion the second largest quarterly profit in twenty-three years.  Now are we to believe that these same banks that are producing money hand over fist are doing something differently to produce such huge revenues.  The answer would be a simple and very flat no!  Now for the most amazing part – these same TBTF banks are doing business as usual – in other words they are making huge sums of money by doing the exact same things that lead the global economies to the brink of collapse – and they are doing it with the blessing of the FED!  This business as usual goes unnoticed so long as the tide remains heading in the same direction or so long as the bull market is intact and interest rates don’t rise.  That remaining the same I’m afraid is just plain unrealistic.

On Monday, I discussed the collision course the now appears unavoidable between the economies and over inflated stock values.  Today I would like to add the willingness of the great and powerful FED to regulate and protect the US economy from slipping off track.  Think about it – not a single US banker has been charged with any wrong doing (criminal) after the financial collapse of 2008 – 2009.  Now let’s take a closer look at section 165 of the Dodd-Frank Act which is titled:

Enhanced supervision and prudential standards for nonbank financial companies supervised by the Board of Governors and certain bank holding companies.

Purpose – In order to prevent or mitigate risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected financial institutions, the Board of Governors shall, on its own or pursuant to recommendations by the Council under section 115, establish prudential standards for nonbank financial companies supervised by the Board of Governors and bank holding companies with total consolidated assets equal to or greater than $50 billion that –

(A) are more stringent than the standards and requirements applicable to nonbank financial companies and bank holding companies that do not present similar risks to the financial stability of the United States.

Resolution Plan and Credit Exposure Reports. –

(1) Resolution Plan – The Board of Governors shall require each nonbank financial company supervised by the Board of Governors and bank holding companies to report periodically to the Board, the Council, and the Corporation the plan of such company for rapid and orderly resolution in the event of material financial distress or failure, which shall include –

            (A) Information regarding the manner and extent to which any insured depository institution affiliated with the company is adequately protected from risks arising from the activities of any nonbank subsidiaries of the company;

            (B) Full descriptions of the ownership structure, assets, liabilities, and contractual obligations of the company;

            (C) Identification of the cross-guarantees tied to different securities, identification of major counterparties, and a process for determining to whom the collateral of the company is pledged;

(2) Credit Exposure Report – the Board shall require each nonbank financial company supervised by the Board and bank holding companies to report periodically to the Board, the Council and the Corporation on

            (A) The nature and extent to which the company has credit exposure to other significant nonbank financial companies and significant bank holding companies; and

            (B) The nature and extent to which other significant nonbank financial companies and significant bank holding companies have credit e3xposure to that company.

Understand that the FED and the FDIC have total authority to “direct a nonbank financial company to divest certain assets or operations identified by the FED or the FDIC to facilitate an orderly resolution of such company under title 11 of the US code.

This is all in place to prevent and head-off another melt down similar to Lehman Brothers back in 2008.  Lehman at the time had reported $639 billion in assets spread out amongst 209 subsidiaries.   But if you remember Lehman couldn’t raise a dime because no other institution trusted or believed in the value of Lehman’s assets.  Now consider if you will that JP Morgan reports $2.4 trillion in assets spread out among a whopping 3,391 subsidiaries.  Can you say complicated structure?  By the way – rumor has it that it was a high JPM “C” level executive that drove the final nail into Lehman’s coffin.  But I digress –

senatorwarrenSenator Elizabeth Warren questioned FED Chair Yellen during her most recent testimony before Congress asking:

“Can you honestly say that JP Morgan could be resolved in a rapid and orderly fashion as described in its plans with no threats to the economy and no need for a taxpayer bailout?”

 Ms. Yellen responded:

“We have given feedback on the first round of plans that were submitted, and are working, actually, to at this point, give feedback on the second round of plans.  In fact, the firms have now submitted a third round of plans.”

Senator Warren again asked:

“I guess the question I’m asking is have they ever gotten to a plan that you can say with a straight face is credible?”

janetyellen Ms. Yellen continued her best version of the Texas two-step by responding:

“I’ve understood this to be a process, these are extremely complex documents to produce.  In our second round of submission, we’re looking at plans that run into tens of thousands of pages.”

To which Senator Warren finished with:

“I think the language in the statue (Dodd-Frank) is pretty clear.  That you are required, that the FED is required to call it every year on whether these institutions have a credible plan.  And I remind you there are very effective tools that you can use if those plans are not credible.  Including, forcing these financial institutions to simplify their structure, or forcing them to liquidate some of the assets.  In other words, break them up.”

Again, a collision between the economy and the stock markets is coming – it is inevitable – and unless something changes – unavoidable.  Is it time to start to break up the TBTF banks?  Is it time to stop the buying of Congress by Corporate America? I hate to say but it is likely too late.

Back at the ranch –

strategy2I came in on Wednesday with my strategies in place; my support and resistance worked out and was ready to take on the NQ and ES.  I wasn’t surprised that the markets were again heading higher.  The moves continue to fit neatly into my current Elliott wave counts for each index.  I jumped in with great expectations and was rewarded quickly.  I didn’t really stop to notice that is seemed to be the same group of stocks that again pushed the indexes higher.  The titans continue to get called upon to hold up the bull.  It always amazes me to hear from some that the bull market is alive and well.  Alive yes, well I’m not so sure.  The cracks are apparent and will soon develop into giant sinkholes that will swallow everything in its path.

Once the NQ started to push into resistance at 3925 to 3930 I began to let any “buy” signals go by and started to “sell” in anticipation of the next leg down beginning.  This ended up being a mistake on my part.  Seems that the algorithmic traders don’t know nor do they care about resistance or when something has reach extreme overbought readings.  Soon, I began to cuss at my screens letting the buyers know of my dissatisfaction to their continued buying of baskets of stocks and futures.  What I failed to do was adhere to my strategy which clearly was telling me to continue buying as well – funny thing about algorithms they don’t have emotions nor do they care who does.  They don’t understand overbought or oversold – they merely perform as programmed.  So, the lesson for me was to recognize that my psychological state had changed, my attitude towards trading had dissipated into “I’ll show them” instead of going along for the ride and deciding later what was bullish or bearish.

Fortunately, I came to my senses after giving back two thirds of my profit on the day.  Knowing when it is better not to trade is an important aspect to becoming successful.  Revenge trading or panic trading may work once in a while, but will never build consistent profits.

Volumes tended to remain on the light side on Wednesday, which continues to keep current analysis in place.  That being larger corrections continue with putting the finishing moves on the internal “B” wave rallies.  Remember, the larger structure being traced out is an A-B-C, where wave A and C are declines and wave B an intervening rally.  Last week saw the completion of wave A with all the markets dropping into support after forming “5-waves” down.  Thus far there aren’t any significant signs that the current rally is the larger advances starting up again.

In the NDX the market would need to break above 3964 with follow through to negate the “B wave” count and put the completion point for the correction back at last week’s lows.  In the SPX the equivalent level would be 1971 and in the DJIA 16,815.

Steer the course and don’t compare yourself to everyone else.  You are not they and they are not you.  Remember to trust and believe what makes you unique at this moment in time and in this situation and allow others to choose for themselves.  Don’t be swallowed up by the chaos and false emotions swirling around.  Remember it’s just a number.

Trading the number remains key to being able to reduce and separate the “noise” from opportunity.  This takes knowing and executing a well-defined strategy and allows you to see opportunities amongst the “chaos” and by trusting the mechanics of your strategy, be able to take advantage of them.

overbought marketOpportunity continues to knock on our doors.  While it doesn’t come without risk, risk can be defined and more manageable. Volatility and broad moves are exactly what a day trader desires and being able to respond without questioning is a luxury many are unaware of.