Several days ago, the federal government announced a plan to shrink home loans. Specifically, the aim of the government’s focus is to reduce the amount that many troubled borrowers would owe on their existing mortgages. The plan would ostensibly let people underwater on their mortgages (i.e. those who owe more on their mortgages than what their properties are worth) to get new loans with the full backing of the Federal Housing Administration (the agency that insures home loans against default). Furthermore, the mortgage companies backing the underwater loans would receive incentives to lower the principals hence the rush of banks in the last few days announcing that they’d be doing just that. According to Moody’s, there are currently about 4.5 million homeowners already in foreclosure proceedings or at least 90 days delinquent on their mortgages with an estimate of 10 million more homeowners who owe more than what their homes are worth. Finally, this plan also includes 3-6 months of temporary aid for borrowers who have lost their jobs. Now, there are all kinds of criticism. The government is taking on additional risk. Why should the government perhaps bail out someone who shouldn’t have had a mortgage in the first place versus helping the people who did what they were supposed to do in terms of paying off their mortgages even if they are struggling due to a cutback in salary or what not. The long-term problem won’t be solved as people without jobs still not able to pay their mortgages whether it is now or later. And so forth. This of course has been bullish for the stock market in the immediate-term. This seems counterintuitive to many, but the logic is actually quite simple. If banks cut their principal payments for mortgagees yet the government backs them, it’s a good thing in the here and now because the implication is that more mortgages will be repaid than originally thought with the banks incentivized by government tenets to do it. Thus, if X amount of money was expected to be recouped, that number becomes X plus Y which is better than originally thought. Will there be an inflection point? Probably. I don’t know. But I do know that the tape tells the story- not intellectualism.
Markets in Asia were generally lower overnight with prices down about 0.6% in Hong Kong. In Europe, markets were up but have gone negative by about ¼%. Oil and gold are sharply higher and the dollar is stronger overall as well. Futures are trading down on a weak ADP report. That ADP report is the main driver as the implication is that Friday’s jobs number will be below expectations. For today, look for a somewhat busy and weak morning and a busy late afternoon as it is the last day of the quarter ahead of what will be a four-day weekend for many. Focus on the relative strength plays, the small caps which will really move today (such as ARQL), and potential window dressing stocks that have moved a lot this quarter for follow through.
Reiterating-
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 specified.
If 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
MCK- closed near a high
CNAM- closed near a high
RIMM- reversed after the rumored AAPL device news in closing near a high
WLK- closed near a high after a brokerage upgrade
SLXP- closed near a high
CSIQ- closed on a high
HON- raised earnings guidance
ITRI- mentioned on “Fast Money” last night
DCTH- closed near a high amid rumors of positive phase III buzz of its PHP technology
FSII- decent earnings
ARQL- reported positive phase II ARQ 197 trial results
ISIS- announced collaboration with GSK
Bad-The following stocks have bad news and/or a weak technical pattern
ZOOM-poor earnings
SAI- poor earnings
ZZ- poor earnings
GS- was weak all day yesterday; closed near a low
CQB- sees 1Q European volume lower than expected
NWPX- closed near a low
ZSTN- closed near a low after releasing poor earnings
LNDC- poor earnings
HEAT- poor earnings
BTU- bid $3 billion for Australia’s Macarthur Coal; would be dilutive for BTU and Macarthur rejected bid implying BTU may need to raise its bid
ONP- offering three million shares at 8.25
AMN- poor earnings
Earnings:
WED MAR 31 BEFORE
APWR AYI BPZ
DG FUQI HEAT
WED MAR 31 AFTER
BLUD GPN MOS
RECN RIMM RINO
XRTX
Good luck today.
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
Joseph R. McCandless- Managing Partner
D. Timothy Seaquist- Managing Partner
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