On Friday, slowly but surely the financial stocks showed weakness which increased in intensity as the day progressed. The trigger was a story out of Massachusetts. The Massachusetts Supreme Court upheld a ruling against the likes of U.S. Bancorp (USB) and Wells Fargo (WFC) regarding their mortgage dealings. Delving into a little more detail, the case concerned exactly as to how the banks transferred mortgages into securitizations. The fear in the markets came from the thought that this particular ruling could affect other rulings which has the potential to invalidate many foreclosures and add to the losses of the banks that originated said mortgages. One of the most common securitization practices concerns whether the right to a mortgage goes along with the promissory note that it secures when the note is sold. Basically, using a personal example, my mortgage was packaged with a group of other mortgages and sold to, well, who knows. However, the mortgage industry argues that all sales are final. Yet the Massachusetts case may well invalidate some foreclosures and jam originators of the mortgages to buy back said mortgages which were transferred into groups of loans. The basic argument against the mortgage industry by Massachusetts homeowners in this specific case is that the banks which foreclosed on their homes did not follow their own guidance for transferring the mortgages into mortgage-backed trusts which issued bonds. If this is the case as Massachusetts ruled, the banks may have to repurchase these mortgages in being forced to take on more bad debt. This of course is a major negative for banks (although perhaps not in the Massachusetts case due to the political leanings of the area and the fact that this result was widely anticipated). There will be many cases throughout the next few months. In fact, the markets turned late in the day on Friday on a headline that a Maine court ruled for JPM in another foreclosure case! So, as a day trader- particularly if you day trade financials- it’s important to keep your eyes to the legal wires for more results.
Markets overnight were generally down throughout the world with Hong Kong down 0.7%, London down 0.5%, Frankfurt down 1% and Paris down 1.3%. Oil is up 1% as the Trans-Alaska pipeline network remains closed. Gold and silver are up slightly along with bonds. The dollar is neutral. Futures are being weighed down on European debt woes but have a floor under them due to a surge in mergers as well as positive developments such as the AAPL-VZ deal. Look for choppy trading with a slight downside bias all day but it’ll be a decent stock-mover day. The focus will likely be on the education stocks on STRA’s warning, the mergers plays such as PGN, the rare earths, the solars on LDK’s positive revenue boost, and the myriad of biotech movers such as GENZ and PDLI.
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
DNDN- closed near a high after announcing it will file for Europe approval for Provenge
RBN- closed on a high after raising earnings guidance
BIDU- closed near a high
AAPL- closed near a high and there are rumors that VZ is supposed to announce an iPhone agreement tomorrow (according to Gizmodo.com)
LVS, WYNN- closed near their highs after JP Morgan raised earnings estimates
MCP- closed near a high
MEE- closed near a high
ADES- closed near a high
LLL- closed near a high
NCTY- closed near a high
TTES- closed near a high after getting approval for its merger with RBN (and moved with RBN because of RBN’s great earnings)
GENZ- rumored to be in talks with Sanofi
MNRO, ACW- featured on “Mad Money” on Friday night
PGN- to be acquired by DUK for 2.6125 DUK shares for each PGN share
VRUS- announced collaboration with BMY for Hepatitis C study
LDK- great revenue guidance
INO- the journal “Vaccine” noted INO’s vaccine targeting HIV Clade C viruses achieved immune responses and protection in non-human primates
CNXT- to be acquired by SMSC for $1.125 in cash and a fraction of SMSC common stock between .03480 and .04264 shares for $2.25 share overall
HGSI- reported progress toward sustainable revenues at JP Morgan healthcare Conference
SLE- “WSJ” noting a consortium has been formed to explore a buyout of SLE
AUXL- decent revenue guidance
QCOR- decent earnings guidance
GERN- positive Imetelstat phase II data
GE- upgraded at UBS
PLA- to go private at 6.15/share
SNN- rumored to have rejected bid from JNJ
Bad-The following stocks have bad news and/or a weak technical pattern
STRA- issued poor 2011 earnings guidance
X- closed near a low after SCHN had poor earnings
LOCM- closed near a low after issuing terrible earnings guidance
ZSTN- filed $50 million mixed securities shelf
ROVI- poor earnings guidance; SNIC may move with it
DD- buying out Danish firm Danisco; company noted it’d reduce 2011 earnings
SMSC- poor earnings guidance
AMAG- poor earnings guidance
ENDP- negative regulatory update on new formation of Opana
PDLI- lost summary judgment in its MEDI litigation
RIG, BP- pipeline woes continue in Alaska
AYI- poor earnings
Earnings:
MON JAN 10 BEFORE
AYI SMSC
MON JAN 10 AFTER
AA APOL
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
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