Wall Street Witch Hunt: Financials

by: Brian A. Davis

We have all heard the term witch hunt before. During the 1950s, the House Committee for Un-American Activities was nothing less than a platform to roast individuals and organizations. While the Committee (with the help of J. Edgar Hoover) was able to produce evidence of "Un-American" activity, little to no wrong doing was ever found. Meanwhile, careers were destroyed, friendships lost, and democracy compromised. One of the lingering questions left from the Communist witch hunts was "What constitutes Un-American Activity?" In a time and era where almost anything goes, there is an opportunity to define... or even re-define what the United States stands for...

For instance, on November 18, 2008, we brought the credibility of BAC's CEO Ken Lewis into question. While it is the job of many CEOs to hype their company, and serve as the point man for new initiatives, Ken Lewis should be compared to nothing more than a snake oil salesman. Since then, BAC has refused to completely cut its dividend to shareholders. Sure the stock would get beaten up... but mergers with companies like Countrywide and Merrill Lynch come at a price.

Even after MASSIVE cash infusions from the first TARP program (approximately $30 billion dollars), it appears that BAC does not have the capital to absorb the Merrill merger after all. But if House Financial Services Chairman Barney Frank has his way, the fine folks at BAC will have their cake... and eat it too!!! If there is such a thing as Un-American Activity, this would be it.

Stock Watch

I entered new positions in SRS, EFU and SCC. SRS is currently trading at 67; its 52 week high is 295 and its 52 week low is 48.63. If you believe commercial real estate is in trouble, as I do, this is a good play.

FAZ, the financial bear fund designed to capture 3x the inverse of the financial sector, ran too fast for me too fill. TARP's failure to recapitalize the banks, to purchase distressed investments, means that financial institutions will need another round of beatings to come clean.

EFU: The European community in general, and the central bank in particular, are in reaction mode cutting rates. Fear is a phenomenal motivator... and they are scared in Europe.

SCC: A bundle of stocks related to consumer discretionary spending. If you believe Obama's stimulus package will fail to deliver relief, or feel that unemployment is headed to double digits, a number of stocks are doomed. This fund has pin-pointed those that will suffer.

FXI: I increased positions on the low-side...

MCRI: I increased positions on 6/5s puts...

Disclosure: Author owns SRS, EFU, SCC and holds short positions in FXI, MCRI