Roubini on the Banks

March 26 (Bloomberg) -- U.S. stocks will fall and the government will nationalize more banks as the economy contracts through the end of 2009, said Nouriel Roubini, the New York University professor who predicted last year’s economic crisis.

“The stock market is a bit ahead of the real macroeconomic and financial news,” Roubini, a professor at NYU’s Stern School of Business and the chairman of consulting firm Roubini Global Economics, said in an interview with Bloomberg Television in London today. “We’ll have some major banks going belly up that will need to be taken over.”

The global equity rebound in March that sent the Standard & Poor’s 500 Index to its best monthly advance in 17 years is a “bear-market rally” and U.S. Treasury yields will “remain relatively low” as investors flock to the safest assets, Roubini said. Treasury Secretary Timothy Geithner’s new plan to remove toxic debt from financial companies won’t be enough for insolvent banks, he said.

Roubini’s outlook contrasts with predictions this week from Templeton Asset Management Ltd.’s Mark Mobius and Traxis Partners LLC’s Barton Biggs, who said that equities are poised to rally as government efforts to revive the economy and banking system begin to work. Investors are “way too optimistic” about the prospects for a recovery in the economy and earnings, Roubini said.

Stress Tests

The S&P 500 surged 7.1 percent on March 23 after Geithner unveiled a plan to finance as much as $1 trillion in purchases of illiquid real-estate assets, using $75 billion to $100 billion of the Treasury’s remaining bank-rescue funds. The government is conducting stress tests of banks to determine how much more capital each will need.

Roubini, who predicts loan and securities losses in the U.S. will reach $3.6 trillion, said the stress tests will reveal that some banks need to be taken over and have their good and bad assets separated before being sold to the private sector. He didn’t name which companies he thought would need to be rescued.

Futures on the S&P 500 expiring in June advanced 1.2 percent to 818 as of 8:30 a.m. in New York.

Critics of Geithner’s plan including Nobel laureate Paul Krugman, a professor at Princeton University, say the government should take over banks loaded with devalued assets, remove their top management, and dispose of the toxic securities. Sweden adopted the temporary nationalization approach in the 1990s.

‘Deflationary Forces’

“Some banks are going to have to be nationalized,” said Roubini. “It’s going to be bumpy ahead of us.”
Geithner and Federal Reserve Chairman Ben S. Bernanke this week called for new powers to take over and wind down failing financial companies. They said the U.S. also needs stronger regulation to constrain the risks taken by firms that could endanger the financial system.

With “deflationary forces” lingering for as long as three years, Roubini said U.S. government bond yields will remain low and American house prices will fall as much as 20 percent in the next 18 months. While the dollar will initially benefit as investors seek a safe haven in the U.S., the currency will ultimately drop as the nation’s trade deficit shrinks, he said.

Roubini dismissed China’s call for the creation of a new international reserve currency as a “pie in the sky idea” that’s unlikely to gain traction any time soon.

Mobius, Biggs

China’s central bank Governor Zhou Xiaochuan this week urged the International Monetary Fund to expand the use of so- called Special Drawing Rights and move toward a “super- sovereign reserve currency.”

Geithner sent the dollar tumbling yesterday by saying he would consider China’s idea, only to drive it back up by affirming that the greenback should remain the world’s reserve currency.

“This was a political call and in a nut shell - it ain’t going to happen any time soon,” Roubini said.

Mobius, who helps oversee about $20 billion of emerging- market assets as executive chairman at San Mateo, California- based Templeton, said March 23 the next “bull-market” rally has begun. Biggs, the former chief global strategist for Morgan Stanley who now runs New York-based hedge fund Traxis Partners, predicted the same day the S&P 500 may jump between 30 percent and 50 percent.

The benchmark index for U.S. equities has surged 11 percent in March, poised for its biggest monthly gain since 1991. The MSCI Emerging Markets Index of equities in 23 developing nations is headed for the steepest monthly advance on record after rising 20 percent in March.

Next few months

Next few months if we are in this magic chop fest wave could prove very difficult to trade. As I said this is the most zig zag wave in the elliott wave theory and therefore only the best traders will get it spot on. It will past though and the next wave should be a easy wave down for the bears. The question we should try and answer here is where and when this wave will end!
I think the first stop on the upside is 875 and from there we might run to the 1045 level but I am not making a call on than now, extremely difficult to tell. Lets play it close and look out day to day as it is almost impossible to make trend calls with this administration out on the tv everyday with some other plan to move the market.

Some timing stuff

I think we could see a little top tomorrow. Why ? on my daily charts it is signaling a peak today or tomorrow as I would be lightening up on any long I have if I did. Dangerous to say go short but we should get a pullback based on the daily charts

Levels to Watch

S&P 808 and 801 are important levels to watch. My gut felling tells me we want 780 area on the S&P and today's 792 might have been that test but who knows.
Watch that 801 level again. if tomorrow we test it and dont hold we will see some weakness belows today lows.
Watch for resistance at the 825 level again if we go up initially tomorrow.

Interesting action

These last three weeks in the market has been very difficult to analyze. Often when you see movement like this it usually means we are in a consolidation cycle or wave and we are merely pushing and pulling between the bulls and the bears. Today action is a perfect example why you have to stay out of the market till we break out of this consolidation. We gave back 300 points on the DOW and then rallied 100+points to end the day positive. Now if you weren't a market watcher you might be like oh the DOW was +89 today but it was one wild ride.
I think we will be in this torture till earnings seasons next month and also till we get the news out about the mark to market and whatever other kind of manipulation they want to put on the market. The problem is near term folks will side step the problems underlining the markets and think these actions will help and send us higher but in the longer term is will just be disasterous because the market MUST be allowed to correct itself without intervention, all they are basically doing is delaying the inevitable and for most of us get killed once again
There is a good shot from the charts I am looking at we are close to a intermediate top here but the problem is that we have windows dressing and most manager will try to fudge their books as usual because March was an up month. What happens in April will all be earnings related, I hope the big guns of GE, Microsoft, Google, Apple and the Banks report good news are we could fall hard. My best guess is we will push up into earnings and half way through we start selling off. Right here is NO MAN'S LAND and it must be respected there is nothing we can do till the market really tips it hands. Play light as it is total chop fest out there.


MARKETJEDI

Market selling off

Just if no one realizes the market is selling off on news that the US latest issuance of Bonds were poorly received.
This is very very bad news for the administration who is trying to raise funds to implement stimulus packages. This will put a shot in the US dollar and as I have been saying this is one of the reasons why the US dollar weakness is the main thing to fear in the future.

Chop Chop and Chop

Not much to talk about here folks but dont expect us to move down into the end of month, Why? because we will have one of the first upside window dressing in months. The fact that the financials and other beaten down sectors have performed well many fund managers will want to end them to their books to look like they are smart.
Also I think wave theorist are wrong on the current wave count in the market. Most are thinking we crash and go to new lows here BUT I dont think so. I really think we chop around or grind higher till we get news on the market to market decision, then their will be the top of this run up.
Right now folks is a time just to kick back and watch, yesterday was testament to this, there will be tons of opportunities soon but right now we are in chopfest mode.



MARKETJEDI