Financials will rally whenever Obama Administration officials and Treasury Secretary Timothy Geithner in particular, are able to convince investors that the combination of the stimulus plans and bank bailouts will result in healthy balance bank sheets, in the very near future. But, in the absence of any identifiable specifics pertaining to the valuation of dubious bank assets, rallies will be unsustainable. Therefore, trade the most vulnerable counters (Bank of America (BAC), Citigroup (C), JPMorgan (JPM), Morgan Stanley (MS) and Wells Fargo (WFC)) with a decidedly short bias.
Financial Exchange-traded Funds (iShares Dow Jones US Financial Sector (IYF), iShares Dow Jones US Financial Svcs (IYG), PowerShares Dynamic Financial Sector Portfolio (PFI), Rydex S&P Equal Weight Financial ETF (RYF) and Financial Select Sector SPDR (XLF)) simply do not reflect the concentration required within the broader sector; from a trading perspective, the focus must remain on BofA, Citigroup, JPMorgan, Morgan Stanley and Wells Fargo, if the objective is to achieve periodic 10-20% gains through this quarter, for starters. General Electric (GE), which is displaying all the characteristics of a financial stock, and Goldman Sachs (GS) are also interesting short-on-rally propositions, but their risk-reward profiles are substantively distinct from the five leading candidates cited.
This is not the time to analyze the Geithner Dossier, as it defies cogent analysis, anyway. Nobody in authority has the will or proven expertise to bring an asset valuation methodology into the public domain. Nobody appears keen to disclose the real risk on bank balance sheets, if such a risk determination has even been made at all. And, lawmakers and regulators, almost without exception, (and President Barack Obama, for that matter), are totally sold on Ben Bernanke's Depression-driven "finger-in-the-dyke" strategy, formally adopted by Fed and Treasury officials many months ago. So, trade accordingly; as necessary information, you should know that the tale of the brave Dutch boy, who supposedly put his finger in the dyke along the Dutch coastline, was a non-factual literary invention by an imaginative New York novelist.
This writer will challenge the very fundamentals of the fallacious bet that an improving economy will allow the financial system to rectify itself in another article. For our present purposes, it is sufficient to realize that bank stocks will witness a daily tug-of-war, between bulls and bears. Depending upon the flow of news (and an abundance of spin), five- and ten-percent overnight moves will become a regular affair. In brief, this is the real moneymaking window today, with due respect to those interested in long-term value investing. All this writer sees in the medium term is chaos; there are no credible facts whatsoever upon which a longer-term view can be founded.
The current short-selling targets are BofA above $6.50, Citi above $4.10, JPMorgan above $26.50, Morgan Stanley above $24 and Wells Fargo above $18.50. Look for sharp, intra-week declines from those levels to exit short positions. With the passage of time, as the markets start realizing that the Geithner Dossier is replete with illogical imperatives, the short-selling targets will need to be revised downward. At some point in the second or third quarter of this year, retail and institutional investors will finally recognize that private equity in these banks is worth zero. Those urging a blanket nationalization of banks today are not madmen, as nationalization, in one form or another is inevitable, within the year.
On Tuesday, Secretary Geithner said that he would be unfolding details from his Dossier in stages, throughout the course of the next few weeks. But it is precisely that "unfolding" eventuality, which is shaping this writer's trading vision today. By all verifiable accounts, "unfolding," could only be interpreted to mean "trial-and-error" or, even worse, "we just don't know." What will certainly not unfold are comprehensive disclosures of risks, and asset valuation premises, which can be subject to independent, qualified scrutiny.
Yesterday, many on Wall Street were hoping that a $2 trillion commitment to the financial and credit marketplace would at the very least, be accompanied by a "written document." However, what they got were mere words, and much vagueness, the result of which was widespread selling. Watch for any number of similar failed-expectation scenarios in forthcoming days and weeks.