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January 11, 2010 – The Bull leads the Bear at the end of Round Five

Bank Failure Friday returns. Consumer Credit dropped sharply in November. Today is the sixth
round of the Title Bout between the Bull and the Bear, as US Capital Markets Jab between
supports and resistances. Can the Bear deliver a knockout punch?
The FDIC closed Horizon Bank (HRZB) of Bellingham, Washington.
Horizon Bank becomes the first failure of 2010, and it was a publicly traded community bank on the
ValuEngine List of Problem Banks. The bank with $1.3 billion in assets cost the Deposit Insurance
Fund $539.1 million with extreme overexposures to C&D and CRE loans – 1396% C&D and 3003%
CRE.
Assuming that the FDIC Deposit Insurance Fund was replenished with $45 billion at the end of 2009,
the fund now has a balance of $25.8 billion, which I say will be depleted by the second half of 2010.
To Review the Regulatory Guidelines - In the fall of 2005, the Federal Reserve, US Treasury and the
Federal Deposit Insurance Corporation (FDIC) realized that community and regional banks were
loaning funds to the housing and real estate markets at a pace above what these regulators thought as
prudent. Guidelines were floated at the end of 2005, and formalized at the end of 2006.
The guidelines state that if loans for construction and land development are 100% or more of risk-
based capital, and / or loans for construction, land development, and loans secured by multifamily and
commercial property are 300% or more of risk-based capital, the institution has loan concentrations
above prudent levels, and should employ heightened risk management practices. These guidelines
have been ignored, which intensified “The Great Credit Crunch.”
This lack of regulation by the FDIC resulted in 140 bank failures in 2009 and 166 since the end of 2007.
Consumers’ are paying down debt by record amounts.
Total borrowing dropped by $17.5 billion in November as Americans borrowed less for the 10th
consecutive month. This is a clear sign that it will be a long time before consumers will support the US
economy beyond the muted success of the holiday season.
Consumer spending accounts for 70% of total economic activity, and November’s drop in consumer
credit was the biggest in dollars terms since records began in 1943, that’s even before I was born. This
statistic excludes home loans and home equity loans, and thus covers borrowing not secured by real
estate. Credit card borrowing fell for the 14th consecutive month, also a record. Consumer Credit now
totals $2.46 trillion.
My Fearless Prediction of the Week - Trading ranges should continue another week with the 10-Year
between 3.868 and 3.675, gold should trade between $1115 and $1167, crude oil should stay above
$77.05, and the dollar index should stay below 80.23. This will keep the Dow Industrial Average
between 10,379 and 10,997. We had the Breakout we await the catalyst for the Fake-Out.

Chart Courtesy of Thomson / Reuters

The Dow continues to move higher in a continuation of 2009. This puts the Bull ahead of the Bear
in Title Fight after the first five days on points. I expect this to remain the case this week as the Bull and
Bear return jabs. I do not expect a TKO against the Bear, but there needs to be a bearish catalyst for
the Bear to score a knockout. That catalyst would cause a weekly close below my annual support at
10,379.
ValuEngine shows ten of eleven sectors overvalued, which is combined with overbought technicals.
The dollar is the wildcard as a weekly close above 80.23 on the dollar index ends the carry trade. This
is why basic industries are 21.4% overvalued and energy is 19.6% overvalued. The cheapest sector is
health care but only by 4.4%.
Send me your comments and questions to Rsuttmeier@Gmail.com. For more information on our
products and services visit www.ValuEngine.com
That’s today’s Four in Four. Have a great day.

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Richard Suttmeier
Chief Market Strategist
www.ValuEngine.com
(800) 381-5576
As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. I
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“I Hold No Positions in the Stocks I Cover.”