Oh Those Fianancial Institutions - The Poor Dears

I feel so bad for the large financial institutions who brought us this mess, who are back to paying record bonuses and who are back to their ways of old. It seems Obama has finally taken some advice from Paul Volcker and is seeking to put some restrictions on the size and trading activity of these behemoths. Now I am all for competitive forces being used as a first line of defense to keep companies acting appropriately, but these institutions have shown repeatedly that they are wholly driven by greed and are more than willing to risk destroying the global economy to line their pockets, so I am all for it.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a0_fV_cRuyvk&pos=1

The fact that these restrictions could hurt their profitability and force them into more traditional banking roles - which currently don't seem to be very profitable due to the hangover of bad loans these institutions made - is okay by me. I agree with Volcker that most of the complex financial instruments these entities have developed over the past 20 years serve no valid purpose and merely increase risk and short term profits.

http://www.bloomberg.com/apps/news?pid=20601087&sid=amU399MsmbB0&pos=3

In any event, between these proposed restrictions, China trying to cool down lending, some less than stellar earnings reports and a mounting consensus that the market has climbed too far too fast, it is not surprising that stocks have taken a breather this week. Indeed, with employment numbers getting worse in 39 states in December:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aNZFxL6vFWZE&pos=6

And with most state unemployment funds either out of money and already borrowing from the federal government or destined to get there in the next six months, it is not surprising at all for folks to pause a bit from their market buying spree of the past nine months. Oh, and did I mention credit card defaults at record levels?

http://globaleconomicanalysis.blogspot.com/2010/01/25-state-unemployment-funds-bankrupt.html

The real question is whether this signals a trend to the bear side, sideways movement for a while or simply a bump in the bull road ahead. I tend to think for now we will not see a significant bear shift and that things will go a bit sideways for a while, with perhaps a bit of a bear slant. To me the true bear market will start in earnest in July. Why July?

By July the stimulus should be pretty much worn off, unemployment should continue to be high, option-ARM mortgages will be reaching peak season for 2010, CRE loans will continue their increase in defaults and the reality that heavily indebted consumers cannot support a recovery will set in. I suspect second quarter earnings will be less than stellar, so I look to July as a likely month for stuff to really start hitting the fan. It could come sooner or later, but the timing seems good for July in my book. (Hey, I was wrong all last year so you never know. Even a broken clock is right twice a day.) Nonetheless, let me note that I am not trying to time anything in my investments. I have given up trying to do so as I am wrong more than right. Rather, in my book the fundamentals are not there for the market recovery we have seen so I am simply banking on this reality setting in eventually. You should define eventually for yourself should you desire to do so.

Disclosures: None.