Upon mulling the matter and doing some research yesterday, it’d appear that U.S. banks that received the results of their federal stress tests last Friday have three options if they indeed need to tack on capital in order to survive the financial storm that has enveloped the world. The first option is to accept direct federal aid; however, this is not practical because it could cause a mini-panic of sorts at the banks that seek financial help. The second option is to directly sell shares of stock to the public, but of course this is not particularly viable either as it’d make current shareholders (much less the overall stock market) very unhappy. Furthermore, it is highly unlikely in these politically charged times that more monies will be added to the original $700 million TARP program. It is (almost) as unlikely that large institutional investors will feel particularly comfortable buying share offerings of distressed banks. Thus, there is one option left over (and it is still not necessarily a good one): changing over the preferred stock held by the TARP program into common stock. This would shore up capital ratios under current accounting rules (especially under GAAP) although it’d dilute stock as well (albeit not quite as badly as out and out issuing new shares of common stock). With this essay painting negative scenarios for all the banks, two questions come to my mind. First, what will happen in the future? I mean, it is so obvious, isn’t it? Either dilution or seeking additional funding would cause these bad banks to see their stock prices further erode. But the second question- so why have we rallied so much so fast? Not only does the perception potentially become the reality but there are a couple of very positive signs. Investors are not quite as scared as they once were amidst the overall picture and things like housing inventories have generally dwindled which portends at least a leveling off of the housing price decline the world has undergone these last few months. Daily epiphany: as rumors of the results leak out (much less when they actually do come out), go with what is happening. Do not necessarily go with the obvious. It seems ‘obvious’ that shares of banks that fail the test will have declines and it seems that shares of companies that pass will have a rise. But things sometimes are not obvious nor what they seem as Mr. Market has a way of doing whatever it wants to do. Thus, the best advice is to be prepared in knowing the situation at each of the 19 largest banks as the week goes on and particularly post- results release next week; a rudimentary observation of the situation much less self-admonition of one’s bias can result in some pretty good day trading not only in this situation, but in all situations.
Overnight, almost all overseas markets were closed for May Day. Tokyo was up about 1% and the FTSE in London is unchanged, but that is about it. With the stress test results delayed and one of the most exhausting earnings weeks behind us, today looks to be as quiet as it has been in awhile. On the heels of one of the best months in stock market history and indecisiveness over the aforementioned stress test results, look for choppy muted trade with trading on both sides of unchanged. Stick to trading the earnings (and the banks if they get going) with financials as is seemingly often the case leading the way directionally today market-wise.
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 (preferably to the downside in a downside market and the upside in an upside market) 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-
Good- The following stocks have good news and/or a strong technical pattern
AMAG- passed an inspection by the FDA of its manufacturing facilities to produce a drug…could allow company to earn profits sooner
MFE- good earnings
ACS- decent earnings
BGC- great earnings
MTD- great earnings
PKI- good earnings
SWIR- good earnings
CQB- good earnings
DLB- good earnings
DDRX, JVA, GMCR- coffee roasters in the midst (arguably) of short covering spikes
VCI- closed near a high
MXIM- decent earnings
TSRA- decent earnings
NETL- decent earnings
NTCT- good earnings
VPRT- good earnings
ARBA- good earnings
IM- decent earnings
WSO, SWKS- on “Mad Money” last night
LPNT- good earnings
UTHR- good earnings
AGP- decent earnings
FLIR- decent earnings
HMSY- decent earnings
DRYS- good earnings
CLX- good earnings
CVX- decent earnings
Bad-The following stocks have bad news and/or a weak technical pattern
HIG- bad earnings
ESLR- atrocious earnings
MET- missed earnings and warned; PRU and AFL may move with MET
ATHN- poor earnings
NPO- closed near a low after posting bad earnings
SLGN- closed near a low
ISYS- closed near a low
LOJN- closed near a low
EROC- closed near a low after slashing dividend and posting bad earnings
BAC- sued by MBI after-hours for almost $6 billion over its CDO obligations; may drag other banks a little lower plus stress test results to be announced Monday
OSK- closed near low of day
MWW- bad earnings
QLGC- bad earnings
CHH- bad earnings
AOC- bad earnings
DF- bad earnings
MA- beat earnings, but selling off pre-open after its huge run up
SPG- lukewarm earnings
Earnings:
FRI MAY 1 BEFORE
AEE AGN AGP
AIV AOC AXL
BPO CCJ CLX
CVX DF
ED FLIR FO
GAS HMSY LPNT
MA MDU NI
PHH PPL RSG
SPG TE UTHR
Good luck today.
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
Morning Comment May 1, 2009
ReplyDeleteStocks got off to a strong start yesterday amid some good economic and earnings news but gave the gains back after Chrysler finally succumbed to bankruptcy. The Obama administration tried to blame hedge funds and distressed debt investors for lacking patriotism but while the President’s job is to defend the taxpayer, institution investors have to answer to their own stakeholders. Washington offered them a package worth less than 10 cents on the dollar; they decided to take their chances in a courtroom.
However, Chrysler’s destiny wasn’t determined yesterday and its ultimate fate lies ahead. It is hard to comprehend a lean mean successful auto company run by Fiat and 90% owned by the UAW and the Federal Government. While the profit motive may promote a bit of avarice and greed, it also creates innovation and efficiency, something not all that evident with the government and the UAW. In all likelihood, it is hard to see a quick surgical bankruptcy proceeding yielding a more efficient car company. Instead, much of what is now Chrysler will be stripped away. Fiat will make a go of it for a few years but it is more likely that Chrysler as we know it disappears than becomes a smaller, more vibrant maker of automobiles.
The Chrysler saga, of course, is going to serve as a prelude to the General Motors (GM-$2) story. The President is playing the same game of hardball with GM’s debt holders as he did unsuccessfully with Chrysler’s. Now that Chrysler has ended in bankruptcy, everyone associated with the efforts to save GM will watch closely to see how smoothly the early stages of bankruptcy proceed. The hope is that little changes from an operating point of view. However, Chrysler is going to shut production for up to 2 months and it will clearly begin to have some impact on suppliers. In the end GM debt holders can be satisfied out of court if they are treated as senior creditors. But Obama’s pledges to auto unions appear to make that difficult. We will all see the story roll out over the next month.
On Wall Street, the conclusion so far is a big yawn. Investors expect both auto companies to shrink substantially and that seems to be baked into stock prices.
Next week the result of bank stress tests will be released. At first it appeared that Monday was the day but now Wednesday appears to be the new target. Obviously, the government is spending more time listening to banks, that might have to raise more dilutive equity capital, argue their case that they can do just fine as they are today. It is unlikely, however, that regulators are going to get swayed. Whatever the results, some individual banks will be affected but the overall banking system will see no big changes as a direct result of the stress tests. The healing process will take time and most of the healing will be accomplished by a very steep yield curve supporting potentially record net interest income.
Other than that, it is a quiet news day. Futures suggest a modestly positive opening. April was the best month for stocks in almost two decades but most major averages are still down for the year. Earnings season is winding down. For weeks investors and the media have been talking of “green shoots” and “mustard seeds” to describe early signs of economic recovery. Given the persistence of consumer spending, inventory adjustments in some areas may have been too severe leading some to believe that the economy may get a surprising boost this spring as inventories are rebuilt. For stocks to continue to move up, these green shoots have to start sprouting. GDP data for the first quarter showed growth in consumer spending but investment spending and exports are woeful. Although stocks have risen sharply over the past eight weeks, there are few signs yet of a robust recovery. Over the next several weeks we will be concentrating on the texture of the ultimate recovery.
Today Judy Collins is 70.
James M. Meyer, CFA 610-260-2220
Additional information is available upon request.
# - This security is owned by the author of this report or accounts under his management at Tower Bridge Advisors.
www.EpiphanyTrading.com