Can you still trust your bank?

Can you still trust your bank?

We have seen three pretty large US regionals bite the dust so far with at least another waiting in the wings. And here it is

I guess its fate is now sealed and shareholders appear to be on the verge of a wipe-out. Of course, with the Fed involved in all of the ‘rescues’, the Big Money interests will be saved while leaving Mon ‘n Pop holding the bag with worthless shares. And the Mom ‘n Pops are often local residents that use their local branch. That’s modern capitalism for you.

So is contagion getting started? Will we see a snowball effect as we did after the Lehman Brothers blow-up in 2008 (it was the fourth largest US bank)?

Whatever develops, the general share markets are riding the threat of another banking crisis very calmly – not so say complacently.

And the shares riding this fear the best are the FAANGs who enjoy god-like status as investors view the Next Big Thing – AI – as yet another cash cow to boost share values.

Of course, it is early days as I see few signs of AI being monetised at scale. Its development has been so expensive that only the Big Tech giants are able to finance it.

But in the eyes of a techie investor, everything is positive and exciting and is bound to produce huge earnings down the road.

This reminds me of the early days of Tesla, the pioneer in the EV market. Ten years ago or so, Tesla had sunk so much into operations that it was in real danger of running out of funds with little prospect of ever earning a profit (except for the carbon credits they cashed in – see Carbon Emissions reference below).

But Musk was able to turn it around just when the tide towards EVs turned with government ‘stimulus’ away from fossil towards electrons got into high gear (to coin a phrase).

So will this almost miraculous adoption of new EV technology be repeated with a monetised AI scheme?

So far, ChatGPT and its brethren are free to use. It will be virtually impossible to change that into a fee-paying operation. But there may be specialised applications that can be monetised.

My point is this – AI is an investor’s dream so far and if/when they realise they are chasing a chimera, stocks will either collapse – or they may duplicate Tesla’s rocket to the moon. So far, bullish sentiment keeps the hopes alive.

But when social mod turns darker, watch out below.

Back to the banks. I have been bearish on UK banks for some time for the simple reason that with interest rates having shot up in a shock to the system, demand for loans should fall, loan losses should rise with economic activity depressed. We are already seeing early signs of this.

For Pro Shares we have been short Lloyds. With my bearish UK banking scenario, the US banking wobbles have depressed sentiment towards the whole sector.

It has resumed its bear trend and only a move above 50p would negate that forecast.

Stock indexes are ignoring banking wobbles

Indexes surged yesterday on the heavily modelled non-farms employment data that will sure to be extensively revised later (they usually are). And that was a clear clue that sentiment had been too bearish. But except for the buoyant tech-heavy Nasdaq, all major US indexes closed down for the week.

So now the battle is drawn. Bulls figure that the Fed will begin to ease (strong economy with good job creation) and banking crises will be contained. The bears believe there are more banking surprises waiting to be revealed with the crashing commercial real estate (CRE) sector bankrupting more firms – and putting the entire banking system in peril.

Despite yesterday’s short covering rally in the US regional banks ahead of the weekend, the rapid rise in rates has created a mammoth mis-match between the low yielding bonds (bought at the top) held by banks they bought when rates were near zero – and the current higher pay-out on their issued bonds. They are losing money on the wide spread hand over fist.

As we traders know full well, marking to market is a brutal exercise in reality recognition. We see it every second in our accounts. But not banks. They can hide the truth so long as they don’t sell any assets – but when they do, stuff hits the fan.

Of course, banking is all about confidence (or lack). Once enough depositors sniff trouble, they pull their deposits – and create the classic bust scenario as depicted in the Christmas film staple It’s A Wonderful Life.

Back then (1940s), the Fed was not enabled to intervene with taxpayer’s money. James Stewart’s Savings and Loan was rescued by local people loaning their savings to re-float the bank. How things have changed!

One very large potential worry is the size of the depositors’ FDIC insurance fund that only covers about 1% of insured deposits (there is also a larger pile of uninsured deposits out there!). At some stage, that will not be near enough when we get a real bank run. Watch this space.

The leading US index is of course the Nasdaq

It is running alongside my ‘line in the sand’ and is heading for the Fib 50% region around 35,000 (current 13,250). But note the RSI – it is at its highest level since the major top in late 2021. It is getting very over-stretched. But momentum is still with the trend and thus odds are good the market can make it towards the target or close to it in the days ahead, provided there are no shocks to emerge in the meantime (definitely not a given!).

Carbon Emissions – who on earth trades these?

Well, here is my latest video. These are all uploaded to YouTube with a more professional look!

Sugar is sweet and the Coffee is perking

As with CE above, these two commodities do not feature very much on the radar of most traders. But they should.

In recent blogs, I laid out my case for trading Sugar which is in a very powerful bull market. Today I am laying my case for Coffee.

There is little in the way of reliable fundamental data on this commodity as it is grown mostly in tropical countries by armies of small farmers. And that makes it ideal for analysis by technical means. Price swings can be huge and that makes it highly attractive to trade.

Occasionally, we do get reports of crop damage from weather or pests that hit the headlines but these are quite rare.

The weekly chart shows the excellent bull market to January 2022 and then a very complex corrective phase (that has been a nightmare to trade) with highly over-lapping waves, This was a period best avoided and a wise trader would recognise that when markets are untradeable, it is best to look elsewhere.

But the decline took it to an exact test of the chart support at 143 and on a good mom div and an oversold RSI (arrow). That made it a low risk long entry.

Since then, the market has pushed up strongly to confirm the three down pattern of the correction. And in mid-April it pushed up to test the upper tramline and has backed off in recent days.

If all of this is correct then I expect a surge from near current levels and a likely push above the upper tramline resistance to new highs.

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A note on trading technique

In spread betting or CFD trading, we use lots of leverage. A small margin deposit can control a large position in your chosen market. That means the timing of your entries (and exits) is absolutely crucial for any particular trade to have any chance of success.

Let’s take the very popular Dow as an example. Daily swings of 300 – 600 pts are not uncommon. Let’s say you are trading £5 per pip and risking £300 per trade on a £10k account (risk ratio of 3.3%) . An adverse move of 60 pips would hit your stop.

Let’s say you have a price target of 600 pips for a potential profit of £3,000 (a chunky 30% of your account). Your reward/risk ratio is then a large 10/1. Very acceptable.

But your 60 pips initial risk is only 20% – 10% of an expected daily swing – a very small margin of error and if you enter the trade with no regard to timing precision, you will be eaten alive by taking more losses than wins.

But let’s say you wish to reduce this risk by trading smaller with a wider stop.

For the same risk, you bet £2 per pip with a 150 pip stop which is a larger 20% – 40% of a daily swing. You thus have a smaller probability of being stopped out – provided you have the direction correct of course.

But your potential profit to your target is only £1,200 (a juicy 12% of account), not the £3,000 in the higher risk scenario. It will take you a lot longer to produce the same gain over time but at lower risk of being stopped out.

So that is the choice set beside every trader. Are you a risk-hungry trader, or more risk averse? Only you can decide.

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