Financial Stocks Respond to Fed Move

The massive gap to the upside is a bitter-sweet move for those with long-term investment horizons around the financial stocks that have been mentioned here in the past two weeks. Bitter-sweet because although it should show good profits for long positions, it also places a big, nasty gap right below current prices. And being that the market has been trending south for a defined downtrend, I can’t imagine this being one of those “gap and go” scenarios. In other words, we’ll probably see prices drift into the gap and at some point, the sellers are going to start hitting bids.

It’s been easy to make profits if one is willing to display rationale and common sense in the face of all the doom and gloom talk out there. Buy Gold and Short the Dollar? Some morons on respectable web sites are posting this kind of talk STILL (albeit in the “comments” section of other peoples articles and not the websites themselves).

Where were these folks five years ago when that trade was to have been recognized? I bet they were just beginning to sell their dot com stocks in the low pennies after paying in the high triple digits! Oh I love the public. So full of hot air.

So let’s take a look:

Blackstone (BX), BB & T (BBT), Fortress (FIG), Ultra Financials (UYG), Ultra Real Estate (URE), JP Morgan (JPM), American Express (AXP), Bank of America (BAC), Wells Fargo (WFC), and Lehman (LEH) are all posting high single digit percentage gains.

There’s no question that it would be appropriate to take some profits and bring the cost basis down on the above stocks. Remember, this is a long-term market operation in the financial stocks mentioned over the past few weeks, and while this is the beginning of that operation, there will be fits and starts. So patience is a virtue. The gap underneath will close, much like the way Bear Sterns (BSC) has pretty much closed the 6 point (10%) gap already.

The Fed did exactly as it should and injected $200 Billion directly where it was needed by accepting Agency paper as collateral for loans to the financial sector. This is what Wall Street wanted to see but I imagine later in the day, everyone will begin to realize that this move will likely bring at least a temporary moratorium regarding further rate cuts.

So this story is certainly not over yet, and more will come later when some of the dust settles.

Comments

[Dennis Lucey:]

As of 1:30 PM, gaps have almost closed on FIG, BAC, JPM, and LEH.

Regarding the TSLF announced by the Fed today, it will be interesting to see how this will actually affect lending by banks. Despite several cuts in the Fed Funds rate and increasing amounts of cash offered through the TAF, mortgage rates have risen over the last two months. This isn't just a reflection of the capital crunch faced by lending institutions; it's also a reflection of the risk in financing a borrower's purchase of a house at today's prices, seeing that price decline, and potentially watching the borrower walk away as their equity declines.

The TSLF may be good for freeing capital for financial institutions (see TMA), but if the intent is to support financing for the housing market, it will only prolong the decline in housing prices, perhaps not in terms of dollars, but surely in terms of time.

2008 Mar 11 01:53 PM

[Investment ...:]

If only you could keep market calls like this coming all the time. I actually played the financial basked you've been covering (except for Bear Sterns) which could be in more trouble than they've let on.

But ultimately, being able to keep a cool head and recommend solid stocks while others are screaming bloody murder, is definately a trait of a professional. Not only that, but the biggest percentage gain in the market on Tuesday was the financial sector. Wow. I am impressed. Who/What is responsible for the content on Investment Capitalist?

2008 Mar 11 09:01 PM

[Investment ...:]

I must say that your market analysis has been spot on. I work at a high profile hedge fund and not a single analyst/trader on our floor had any conviction and we even started a pool on how these financial stock picks would play out. Not that I followed these blindly. I actually had the same names on my radar and was building my lines in most of them when I read your analysis. I just went bigger. But again, you nailed it with an uncanny (and eery) degree of accuracy. Any chance you might let us know who/what is responsible for these market calls? I mean, the financial sector was the top performer on Tuesday. Albeit it was the most oversold, but almost half of your picks were up double digit % gains! UYG, PJC, BX, FIG, MER and LEH have just doubled my performance numbers for the entire year! Thanks whoever you are.

2008 Mar 11 09:08 PM

[deefree:]

mtrader i hope you protected that gain by selling off those picks

2008 Mar 14 06:38 PM