5/11/09 (Banks sell shares? Analyst Bearish?)

Traders,

Sorry about Friday’s preview – it seemed to of been cut off. The banks are in a volatile pattern after their historic rally – Thursday they sold off hard, Friday they rallied, and this morning they look like they are under pressure again. It is a significant battle between the optimistic view that the stocks had been oversold (or undervalue) and probably correctly so – but to that note they have also rallied well over 50% or more. They now battle the reality that regardless of the view of the “Stress Test” they still need more money and facing continuing credit risk (commercial paper and consumer debt). The fight now is between those that still believe they are undervalued and the worst is over vs. those that believe that fundamentals still don’t add up. Regardless of which camp you are in – the truth be told – it is still to hazy to make a valid fundamental judgment. They need more money – that should tell us something.

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Selling Shares to raise money?

If you take the 1,000 foot view it seems like those in the know make the money and those that don’t know are the losers. Wells Fargo and Morgan Stanley announced selling shares to raise money (important to note after the stocks made a significant rally). Who are they selling shares to, after the stock made this rally? Answer = the bottom rung buyers – those that failed to buy at lower prices and waited after stocks have rallied 50% or more before buying.

It reminds me of last year, when the banks complained about the short-sellers driving down shares. They regulators issues a ban on short selling on the financials, the financial stocks proceeded to rally hard and fast, and at the top – guess who sold? The banks – the banks sold their stocks after complaining it was hedge funds and short sellers driving down prices. Funny – the ONLY complained when share prices were low and they didn’t want to sell their own shares, but they sure didn’t have problems unloading millions of shares after the rally.

Well – guess what – those banks are at it to raise money again. Wells Fargo and Morgan Stanley was first, now the line is starting to get long – Capital One, U.S. Bancorp, and BB&T. Of course the spin is they want to pay back the TARP, but it’s funny they also NEED money (remember the Stress Test indicated that 10 out of 19 banks needed more money and the FDIC list of troubled banks continues to grow).

Of course the spin sounds good – “We want to pay back the TARP and tax payers!” – Yeah right – then why didn’t they sell shares before when they needed money? Because when the government is handing out money, you don’t look a gift horse in the mouth. They now KNOW that well is dry and as much as the Administration and Geithner wants a reload of the Tarp, getting that past the Congress is going to mean buying lots of votes.

The pre-market is showing the banks are under pressure again. Continue to expect volatility in the financial sector.

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Earnings beat – now analyst Bearish?

I was listening to Bloomberg radio last week and the guest analyst was extremely bullish, he reasoning – that companies significantly beat earnings (over 30%) – after is excitement and “the worst is over” speech, the host said, “But didn’t these companies significantly lower their forecasts and analyst lower their expectations to very low levels?” – He response, Yeah, but they still beat them.

My point, it is all relative. Some of these companies that beat, where banks and auto companies. GM beat, but what did it beat? It ONLY lost $9 per share (note the stock is $1.50 a share). Expectations were for $10 to $11 a share loss. So as you can see, beating “going out of business estimates to be saved by government bailouts” – is not really beating anything. The banking sector by and large beat estimates, but the too received bailout, were able to move things off balance sheets, and some changed to banks (thus changing their quarterly reporting and able to drop off an entire month of losses), add in the new accounting standard – and now a bank has made a huge profit, the irony – they still need money.

Of course if this doesn’t make sense to you – it doesn’t make sense to those analyst either. A story in Bloomberg stated that many analyst have recently turned bearish – citing reasons from stocks over-shooting price targets and becoming overvalued. Maybe those previously lowered forecasts and estimates were too low, maybe the accounting changes that create paper profits on lower revenue really don’t make that much sense.

Regardless of the reason – the article seems to suggest that while not all analyst think the market is heading back down, they collectively agree that it really cannot sustain this kind of rally – at least not with questionable fundamentals.

We will see – the market moves on perception as we have seen.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aVxRKebyGa5o&refer=home

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Futures Pre-market

The futures are looking lower, bad news about Toyota and Asian slowdown put pressure on Asian markets. Futures are pointing to a lower opening.

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Support / Resistance

INDU 8000 / 8500 (I know we are above 8500 – but I don’t feel that it is confirmed there – if you are uncertain get neutral at 8500, today it could turn into a resistance level, but I don’t think it is support.)

NDX 1350 / 1400 (We didn’t get too much movement and closed almost unchanged – 1350 could be in the cards today.)

SPX 900 (Watch this today – if we close above or below.)

RUT 500 (Again – a test point – to see if we close above or below.)

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Gold 900+
Silver 12+
Oil 55+

Dollar is starting to look weak this last couple weeks – watch to see if that continues.

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Conclusion

It seems that volatility – while premiums have come down – has not left the market. Hidden volatility could be mounting and we could see not only intra-day volatility, but day-to-day volatility increase. The news is out, stress test, budget past, earnings, GDP, jobless rate, FED rates – there is nothing on the horizon – news wise – that we are expecting that could jolt the market. Thus we could be in a reality sinking in again mode and realize the shortfalls of revenue that could continue to stress the economy.

Expect volatility, lock in gains, and hedges directional positions.