I remember in early 2007 when the PitBull told me there was “rotten wood” floating around in the stock market leaders, the banks and brokerage stocks. I will never forget those words nor will I ever forget what unfolded over the next few years. While we all know the S&P 500 (CME: SPM14) is up 180% from its March 2009 low and up 30% last year we also know very few people are cheering.
Sustainability
One of the things that the big banks and brokerage companies are dealing with has been playing out in front of our eye for years. Sure, part of the “slowdown” came as the credit crisis played out and millions of people lost jobs in the US. Eventually, the economic party on Wall Street and the lack of regulation was going to catch up with the industry.
Over the last few year I have pointed out how there were over 500 clearing firms between the CME and the CBOT and that today there are only 40 clearing firms of which only 10 can do a small account. On a much smaller scale the exodus in the futures markets is just like what we see going on on Wall Street: an unsustainable power shift away from a broad range of investors and towards a few big, possibly too-big-to-fail players. As the big banks and brokerage companies continue to seek new ways to make money they find themselves unable to keep up. With fewer people trading the commission base is disappearing. New regulation has shut down most of the in-house trading desks and the giant drop in the overall customer base is making the big commissions base the banks used to enjoy only a fraction of what it was in 2007.
As we edit this article, HSBC (NYSE:HSBC), Europe’s biggest bank, reports that its 1st quarter profits dropped by 20% from a year ago and that last year’s profits came largely from sales of assets and the layoff of 40,000 employees.
While the shrinkdown continues few in the industry are saying much about it publicly, every much like what is going on with the futures and options based trading accounts that many Chicago firms depend on to survive.
Conclusion: a great shrinking
One of the major effects of the 2007 Credit Crisis has been the overall shrinking of the trading business. It really doesn’t matter if the markets go up or down, with the volumes as low as they are many of the big banks and brokerage firms that made up our industry are either closed due to new regulations or just not trading. We see it on the floor of the CME Group every day where the once-mighty S&P 500 futures have gone from a record 6.69 million contracts traded in one day to barely being above to do 1.5 million contracts a day. It’s going to be impossible for Wall Street to replace what it has lost over the last several years or for the S&P to get back to where it was in 2007. The Asian markets closed mostly lower and in Europe 6 out of 11 markets are modestly lower. Today’s economic schedule starts MBA Purchase Applications, Gallup U.S. Job Creation Index, Productivity and Cost, Janet Yellen speaks, EIA Petroleum Status Report, 10 Yr-Note Auction , Consumer Credit and earnings from Prudential Financial(NYSE:PRU), Twenty-First Century Fox(NASDAQ:FOXA), Anheuser-Busch Inbev(NYSE:BUD) and Duke Energy (NYSE:DUK). Alibaba will officially file for an IPO, which may affect shares of Yahoo! (NASDAQ:YHOO), a major shareholder.
Our view
If you think we are surprised the S&P sold off on Turnaround Tuesday you’re wrong. It is and has been one of the most used-up stats we look at.
- In Asia, 8 of 1o markets closed lower : Shanghai Comp. -0.98% , Hang Seng -1.05%, Nikkei -2.93%.
- In Europe, 6 of 11 markets are trading lower : DAX -0.13%, FTSE -0.39%
- Morning headline: “S&P Futures Seen Lower Ahead Of Yellen Testimoney ”
- Fair Value: S&P -5.33 , Nasdaq -8.34 , Dow -54.92
- Total volume: LOW 1.37mil ESM and 7.7K SPM traded
- Economic calendar: MBA Purchase Applications, Gallup U.S. Job Creation Index, Productivity and Cost, Janet Yellen speaks, EIA Petroleum Status Report, 10 Yr-Note Auction , Consumer Credit and earnings from Prudential Financial (NYSE: PRU), 21st Century Fox (NASDAQ: FOXA), Anheuser-Busch Inbev SA (NYSE: BUD), and Duke Energy (NYSE: DUK). Alibaba will officially file for an IPO, which may affect shares of Yahoo! (NASDAQ: YHOO), a major shareholder.
- E-mini S&P 5001869.75+5.50 - +0.30%
- Crude102.15+0.02 - +0.02%
- Shanghai Composite0.00N/A - N/A
- Hang Seng21746.26-230.07 - -1.05%
- Nikkei 22514033.45-424.06 - -2.93%
- DAX9521.30+53.77 - +0.57%
- FTSE 1006796.44-2.12 - -0.03%
- Euro1.3919
