Fed Policy Creates Wall Street Shenanigans

Least Favored in 2013: Featuring the year's shockers from Wall Street to Washington. Read Fed Policy shenanigans; Tech spies; SeaWorld tragedy; Caterpillar-China scandal; Bud Beer scandal; Bill Ackman's Herbalife; LIBOR rigging; Forex Scandal; and check out this video CEO Walk of Shame.
 


NEW YORK (TheStreet) -- Wednesday's Federal Open Market Committee meeting celebrates the fifth anniversary of the 0.0% to 0.25% federal funds rate, which has been bailing out the big money center and regional banks but has not trickled down to help to consumers and small businesses on Main Street.

The statement from Wednesday's FOMC meeting implied that we will likely celebrate a sixth anniversary a year from now. The Federal Reserve did decide to begin to taper its quantitative easing programs in January lowering monthly purchases of mortgage-backed securities by $5 billion to $35 billion per month and purchases of U.S. Treasuries by $5 billion to $40 billion.

Fed policy has been designed to lower long-term interest rates but instead longer-term yields are on the rise. The yield on the U.S. Treasury 10-Year note was as low as 1.614% on May 1 and traded as high as 2.929% after the Federal Reserve's statement. This puts upward pressure on mortgage rates while refueling speculation in commodities and the stock markets.

Ben Bernanke's monetary policy has resulted in Wall Street shenanigans that allow professional investors and traders to speculate in commodities and the stock market resulting in bubbles that always pop. The housing bubble popped between mid-2005 and mid-2006 and is now re-inflating. The crude oil bubble popped in mid-2008 and the gold bubble popped in the third quarter of 2011.

The easy money and Wall Street shenanigans had the major equity averages to peak in late-2007 with a quick bear market into March 2009 when the S&P 500 test the devilish 666 handle. The rally since than is creating the biggest stock market bubbles ever.

Wall Street has benefited from Fed policy, while Main Street struggles to make ends meet. Family incomes have declined while the cost of living rises. Higher U.S. Treasury yields are not being passed on to savers. With the yield on the U.S. Treasury five-year note at 1.50%, five-year CD rates at the major banks in Tampa Bay are between 0.20% and 1.00%. Before the Great Credit Crunch bank CD rates were usually higher than the yield on Treasuries.

At the same time the 0.0% to 0.25% funds is not helping consumers who face credit cards rates as high as 24.9%. Small business, the key to sustained economic growth at the local level, face higher rates on lines of credit from 5.25% as the credit crunch began to 9.25% today.

The shenanigans of Wall Street has banking regulators including the Federal Reserve and the Federal Deposit Insurance Corporation keeping their eyes and ears on the bigger banks as the banking systems face several issues in 2014.

Banks will likely face tougher stress test parameters in 2014 as the Federal Reserve may use its own estimates on the effect that a recession would have on bank balance sheets. As I have shown in a recent post on Dec. 3, Four Too Big To Fail Banks Set Multi-Year Highs the big banks control a larger share of the assets in the banking system at the end of the third quarter of 2013 then at the end of second quarter of  2008 when the Great Credit Crunch began. This could force the Fed to require banks to increase capital and limit dividend payouts.

Then there's the Volcker rule that will likely ban or significantly limit proprietary trading. The big banks say that strict rules to limit risk taking could cost them billions as activities such as market-making, underwriting and hedging. In my days as a market-maker in U.S. Treasuries you needed to have a market bias in a proprietary book in anticipation of the flow of business you expect from your institutional clients. Quite often if I bought or sold a treasury bond I would offset that risk with a hedge in a different maturity note of bond.

In my opinion, the riskiest form of shenanigans is in the world of derivatives. At the end of 2007 the FDIC Quarterly Banking Profile showed exposures of $166.1 trillion in notional amount of derivatives. At the end of the 2013 third quarter this exposure has grown 46.2% to $242.9 trillion. Our regulators should take action to limit risk in this category of exposures by raising margin requirements and only allowing positions in contracts and structures that can be marked to market instead of marked to myth.

Here are my buy-and-trade profiles for the seven big banks that service the communities in Tampa Bay:

All seven have hold ratings according to www.ValuEngine.com with overvalued readings between 16.2% and 38.8%, and with gains of 21.8% to 38% over the last 12 months. All are trading above their 200-day simple moving averages which reflect risk of a reversion to the mean.

Bank of America (BAC set a multi-year intra-day high at $15.98 on Nov. 25 and traded as low as $15.06 following the Fed Statement. The 50-day and 200-day SMAs are $14.81 and $13.75 with a quarterly pivot at $15.30 and monthly and annual risky levels at $16.03 and $17.07.

BB&T Corp (BBT) set its multi-year intra-day high at $36.59 on Aug. 5 then traded as low as $32.65 on Oct. 8. BB&T is above its 50-day and 200-day SMAs at $34.28 and $33.45 with a semiannual pivot at $35.29 and monthly and quarterly risky levels at $36.26 and $41.44 with my pivot tested on Dec. 16.

Fifth Third Bank (FITB) set its multi-year intra-day high at $20.98 on Nov. 20 then traded as low as $19.76 on Dec. 4. Fifth Third is above its 50-day and 200-day SMAs at $19.57 and $18.34 with semiannual, monthly and quarterly risky levels at $21.10, $21.14 and $21.31.

JPMorgan Chase (JPM set its multi-year intra-day high at $58.14 on Nov. 15 then traded as low as $55.40 as the Fed statement was read on Wednesday. JPMorgan is above its 50-day and 200-day SMAs at $54.60 and $52.59 with semiannual value levels at $50.37 and $48.81 with monthly and quarterly risky levels at $59.28 and $59.44.

Regions Bank (RF) set its multi-year intra-day high at $10.52 on July 24 then traded as low as $8.84 on Sept. 24. Regions Bank is between its 50-day and 200-day SMAs at $9.64 and $9.27 with a semiannual pivot at $9.80 and monthly and quarterly risky levels at $10.68 and $11.83.

SunTrust Banks (STI) set its multi-year intra-day high at $36.99 on Nov. 25 then traded as low as $34.83 on Dec. 13. SunTrust is above its 50-day and 200-day SMAs at $34.86 and $32.53 with a semiannual pivot at $35.18 and quarterly and monthly risky levels at $37.15 and $37.47 with my pivot tested as the Fed statement was read.

Wells Fargo (WFC has been trying to trend above $44.75 since July 22 and it did so following the Fed Statement to a new multi-year intra-day high at $45.06. Wells is above its 50-day and 200-day SMAs at $43.10 and $41.10 with a semiannual value level at $40.04 and monthly and quarterly risky levels at $46.66 and $48.05.

At the time of publication the author held no positions in any of the stocks mentioned.

Follow @Suttmeier

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier is the chief market strategist at ValuEngine.com. He has been a professional in the U.S. Capital Markets since 1972, transferring his engineering skills to the trading and investment world.

Suttmeier has an engineering degree from Georgia Tech and a Master of Science degree from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. He became the first long bond trader for Bache in 1978, and formed the Government Bond Department at LF Rothschild in 1981, helping establish that firm as a primary dealer in 1986. This experience gives him the insights to be an expert on monetary policy, which he features in his newsletters, and market commentary.

Suttmeier's industry licenses include, Series 7 and Registered Principal (Series 24). He has been the Chief Market Strategist for ValuEngine.com since 2008 and often appears on financial TV.

Click here for details on Suttmeier's "Buy and Trade" investment strategy.

Richard Suttmeier can be reached at RSuttmeier@Gmail.com

More from Opinion

Elon Musk's Twitter Tirade Is the Dumbest Thing on Wall Street

Elon Musk's Twitter Tirade Is the Dumbest Thing on Wall Street

Why Google's Search Momentum Won't Be Badly Hurt by New EU Rules

Why Google's Search Momentum Won't Be Badly Hurt by New EU Rules

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Time to Talk Tesla: What Happened This Week, Elon?

Time to Talk Tesla: What Happened This Week, Elon?

Apple Needs to Figure Out Its Self-Driving Vehicle Strategy

Apple Needs to Figure Out Its Self-Driving Vehicle Strategy