With Voting - Expect Volatility

stocks voting boothWe have reached yet another November 2nd voting day and I expect to see some fireworks that usually accompany the day. It is been estimated that Wall Street has already factored in the expected "change of power" that is to take place with a Republican victory, however that may not be the result. If it is not the result, I would definitely expect to see a big drop in markets, financials especially.

We are starting to see some unique transactions that are new to this cycle that we saw in the 90's. This is the trading of distressed and performing notes from one bank to another. Banks benefit greatly to profit off of written down loans from other institutions. For the selling bank, there is not much net effect as the asset has already been written down following an appraisal. If this action is reversely repeated, then it can turn out to be quite beneficial and profitable for banks.

So what does this mean for the economy. Well, banks making money does not necessarily mean a healthy economy. Sure, we need the banks to be liquid and healthy, however, banks have been making record profits the past year and as for the commercial lending market, well, it remains pretty frozen. In fact, providing a route for banks to be so profitable without having to lend, may come back to bite us in the near future. As of now, banks are able to borrow 12 times the dollar you deposit and put them in treasuries, yielding a sub 3% return when they only have to pay you 0.45% on your dollar. When you do the math, you can quickly see how profits are piling up.

As of now, the profits are severely needed and banks are pacing their disposal of distressed properties at what they perceive a healthy rate to coexist with their profits. This is why a defaulted loan may get ignored for a year, only to have a speedy eviction notice pop up one day. The question is, when banks begin to become more balanced, will we begin to see lending occur. Why should the bank take on that kind of risk for profits that are pennies compared to their current arrangement. You can quickly see the paradox that exists.

We will know by tonight, whether or not big movements will be made. Either way, history tells us that day after voting days are usually a bit more volatile than the rest. No matter what happens, new uncertainty is created, which in turn shakes investor confidence a bit. So it will be interesting to see how it all unfolds.

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