Get ready for a term you’ll be hearing about a lot in these coming days and weeks. The concept is “good bank versus bad bank.” Basically, the Obama administration is on the verge of choosing a course in which bad assets, i.e. non-performing and illiquid assets will be purchased from banks. The plan would attempt to mitigate the key issue of attempting to price these assets by using a model-pricing mechanism. Either the model would factor the government’s staying power to maintain the assets and pay for said securities with inexpensive funding which would boost the inherent values of the banks. Thus, the government may well end up paying above the current market value for these assets. However, if the government were to pay below the value at which the assets are being carried on the bank’s balance sheets, the bank would be forced into issued common equity to the Federal government which of course would dilute the existing shares. The net of all of this is that the government basically annexes the distressed banks, separates the good and the bad assets, and then eventually resells the newly-polished bank to the private sector. The bad assets are stashed in a taxpayer-funded bad bank and eventually sold off, usually at a loss to taxpayers thus the crucial importance of the price utilized by the model-pricing system. The point of all of this is to write everything bad off and then recapitalize- the opposite of what happened in, say, 1990’s Japan. Of course, this mechanism is very difficult to get correct; if overpaying for assets, too much money is pumped out of taxpayers’ hands yet if underpricing, the banks would become nationalized for all intents and purposes. Another problem is separating good from bad assets. Therefore, this is not an easy solution needless to say. For day traders, it creates a great trading situation if nothing else. The initial impulse is that bank stocks will be bid up because this solution could potentially end the crisis by getting money sloshing around again in the credit and debt markets. Whether this will hold as the end-game for this matter would be based on the model-pricing mechanism is not for me to say or even offer my opinion- but whatever opinion you have, you cannot let it affect your day trading. All that you should do as a day trader is react to what you see in front of you. Trading will be very rumor-driven much less news-driven in the financial sector as details flow out so whether you think the plan will succeed or fail (or even be implemented), again, trade your screen- not your intellect or heart.
Prices were up about 0.5% in Tokyo and Sydney while European bourses have rallied 2% to 2.5% as of this writing on the anticipated good bank/bad bank rumors. Futures state-side are indicated sharply higher as well. Trading today will be very rumor-driven and busy in the morning and the afternoon. The Fed meets today so while interest rate policy will remain unchanged, who really knows exactly what they can or will say? Barring details of the Fed plan indicating the dilution tenet per the aforementioned discourse in today’s blog, look for equities to maintain their strength, again with a somewhat placid late morning/early afternoon as traders settle in for the Fed release.
Watch list:
1282009Eriklist.zip
Reiterating-
Please understand that if the ideas do not get to the hoped for set-ups cited below, more often than not, one should not blindly trade the symbol next to said idea.
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 based on direction of the market unless specifiedIf something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-
Most stuff today is news-centric as equities did not close near a high nor a low yesterday. Furthermore, it is a very news-worthy day with the bank rumors and earnings moving stocks.
Good- The following stocks have good news and/or a strong technical pattern
WFC, BAC, C, STI, USB, BK, STT, PNC, JPM- among the banks in particular and financials which will be in play today on the rumors of the good bank/bad bank plan; please please do not scalp them- wait for bigger moves and go with the trend rather than letting your opinion of the plan fog judgment. Also, WFC beat earnings and indicated they will not be accessing TARP.
MWE- closed on the high yesterday
YHOO- good earnings; CEO said ‘all options are on the table.’
NSC- good earnings
SYK- good earnings
ALTR- decent numbers
VPRT- great earnings
JAVA- smashed earnings
TUP, RIMM- mentioned on “Mad Money” last night
BDX- good earnings
BHI- great earnings
GD- beat earnings
T- beat earnings
Bad-The following stocks have bad news and/or a weak technical pattern
GILD- beat slightly, but no guidance
DV- met earnings, but with the run-up recently from the pending legislation in Congress, it will likely sell off on the news
ELX- bad earnings
PLT- poor earnings
GE- Moody’s to review the company for possible downgrade
MMR- broke to a new trend low yesterday; looking to short thru Tues 6.60 low when/if it gets there
CHK – announced offering of $500 million of senior notes
BA- missed earnings estimates
LM- abominable earnings
TEL- missed earnings
Earnings:
WED JAN 28 BEFORE
AMG BA BDX
BEN BHI CFR
COP DOV GD
HES LM MKC
MWV NYT
PX SAP
SO SY T
TDW TEL USG
WFC WLP WTNY
WED JAN 28 AFTER
AF ALL AMP
ARG AVCT BSX
BXP CAI CAVM
CBT CTXS CVD
DNB DRE DST
EGN HBI ISIL
KEX LRCX LSTR
MEOH MTH MUR
NTY OI QCOM
RHI RYL SBUX
SEPR SYMC TSCO
TTEK WDC
Good luck today.
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist of Epiphany Trading, LLC
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