Did we get a glimpse last week of what's ahead of us when the Fed revealed its stress tests and said that some banks are going to fail and will have to cut their dividends?
I thought this was a total wake-up call that people didn't see coming. Once again, I think the banks are the Achilles' Heel of this market and people don't seem to realize that they have this power over the market.
When people ask me why the market's up, despite the decline in the economy, I come back and say there is an almost total disconnect between stocks and the real economy. There are so many stocks that are doing well from so many different industries that it is hard to believe that anything's wrong at all.
But it's been that way forever.
When can it change?
That's simple: July 14. That's when Wells Fargo (WFC) , Citigroup (C) and JPMorgan Chase (JPM) report. These companies have had good earnings for ages and it has meant nothing, nothing at all. The stock of JP Morgan has gone from $141 to $93. Citigroup's stock has traveled from $83 to $50. Wells? It's gone from $54 to $25. They all have good yields: JPM's at $3.84, Citigroup's at 4%. The yield for Wells Fargo, though, is almost 8%. That's too large. It's usually a signal that the dividend must be cut.
Now I suspect that each bank will have something people don't like. JPMorgan should be buoyed by its trading division, but any sign of a spiking of defaults will be viewed negatively. I wonder whether Citi, which has a terrific credit card business will talk about a decline in use and a spike in defaults. I just suspect a decline along a whole host of loans by Wells Fargo. The number might be so high that they have to take action, and slice that dividend. That will cause a shuddering because the crutch of the dividends seems to have stopped the decline of the stocks. Knock the crutch; they go lower. They will color the market lower, because they are at the real intersection between the economy and the averages.
Why am I so certain they could be at risk? Because we have never seen a moment, even during the Great Depression, where people have simply ceased paying rent and gotten away with it. Mortgage defaults, credit card defaults, they could be legion. The banks may even have to admit that come the end of the special $600 jobless benefits they will see a big spike in defaults.
It's almost as if contract law is meaningless.
Right now it is a big deal if a tenant pays. Monday morning, Boston Properties (BXP) , the huge office landlord, reports that 98% of its office tenants paid this month, as it announced. But BXP doesn't cater to the small- and medium-sized businesses that are really in trouble. They are not trying to collect from those without a job. And there is no threat of eviction.
Now the good news? When the bank's away, the cats will play. We have 11 business days to trade without the banks hanging over our heads. And, again, remember the admonition of our most esteemed chartist, Larry Williams, who points out that this is, historically, a great week to buy.
Judging by the nearness of the bank reports, though, next week might be a great week to sell.
(JPMorgan Chase is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells this stock? Learn more now.)
