The Senate is aiming for a final vote on the financial reform bill this week. I maintain my stance that this is only a short term market headwind. Others, like banking analyst Meredith Whitney, are telling investors that this will cause a long term shock to the system. No way. The stock market is forward looking and the repricing of these banks is happening right now. This is a sell on the rumor, buy the news kind of event.
Nobody is against financial reform in general, we all know banks shouldn’t behave like hedge funds, but we do need details before the stock market uptrend can continue. There’s actually a case to be made that the unrelenting fear coming from Europe has caused the repricing of financial stocks to happen more quickly that it otherwise would have. Judging the market’s rally into Monday’s close, the financial reform correction could be nearing completion.
The action out of Europe was positive until big mouthed Paul Volcker and Deutsche Bank CEO Josef Ackermann renewed the fear last Friday. Ackermann voiced his opinion that Greece won’t be able to repay its debt and Volcker issued his forecast that euro disintegration would be the result of the crisis. These two men should know better than to spread such pessimism at a vulnerable time when Europe is working to fix its problems. Similar foolish comments were made when the U.S. was beginning its ascent from the bottom of the financial crisis in March 2009. These men discount the potential of an improving economy. They discount the benefits of a lower euro. They discount the saving grace of renegotiating debt obligations. Governments have many tools at their disposal to stimulate recovery. They truly are too big to fail under current circumstances.
For a big picture perspective of the current market environment, consider that on April 27th I wrote the following note in an Economic Timing Market Update:
It looks like the selloff has finally begun. For two and a half months this market has been in a steady uptrend, investors are overdue for some profit taking. It will be important not to overreact in the midst of this correction. As it matures, the media will find false explanations to rationalize the price action. Two weeks from now we all might be contemplating the possibility of a double dip recession, of a consumer collapse, of Greece, etc... all because the media has to fill 24 hours a day/7 days a week. The truth is that this selloff has nothing to do with fundamentals. Once again (as we saw at the end of January) the market is due for a technical pullback. This characteristic is part of stage two of the market recovery.
Wouldn't you agree that the media is playing along perfectly? Today we are artificially convinced the euro is going to derail the U.S. economic recovery. Really? To show just how fearful investors have gotten, CNBC ran a poll and 38% anticipate the market will crash to Dow 5,000 this year. This sentimental overreaction always happens in a correction which is why economic timing is such a wonderful way to keep yourself right side up as an investor.
During an economic cycle of improvement it is important not to get carried away with the negative sentiment. It's important to understand the headwinds, to trade around the volatility and to know that the long term trend is still intact. Because we are in an environment of long term economic expansion, investors need to be careful with hedge positions. Our next step will be to sell out of these protective positions at which time we will look to take advantage of the selloff. Two weeks from now we should know what the financial reform bill looks like, the market will have grown tired of the euro story, and Apple (AAPL) will be leading the market to the upside with the international release of the iPad on May 28th and the release of the new iPhone on June 7th. Profiting from the ebb and flow of the markets is essential in today’s world of volatility.
Disclosure: Long AAPL