Banking Uncertainty - It's Back

Includes: BAC, ETFC, SKF
by: Jason Schwarz

Monday marks the first day in over a month that financials are back in the clouds of uncertainty. The banks themselves have exceeded expectations with their surprisingly strong Q1 earnings reports, but 2009 is a year in which the government is in charge and when the government is uncertain about their next move the stocks will suffer accordingly. It seems that the Obama administration is wanting to wage a little war with the banks who have refused to participate in PPIP and who want to quickly pay back TARP.

Jamie Dimon’s comment last week that JP Morgan (NYSE:JPM) will not participate in PPIP definitely rattled the administration. So now, the government is threatening to stick it to these ungrateful banks. Stress test results will now be released to the public and Chief of Staff Rahm Emanuel floated out the idea that bailout funds might all be converted into common stock. These announcements raised the level of uncertainty and have brought back a significant perception of fear to the sector. Nobody wants to own a bank that will have to convert shares to the government in the near future. Nobody wants to own a bank that comes in at the low end of the stress test grade. Until these issues get resolved, we will be looking at a difficult few weeks. I am buying the Ultra Pro Shares Financial Short (NYSEARCA:SKF) to hedge my Etrade (NASDAQ:ETFC) investment; I have also sold out of my Bank of America (NYSE:BAC) position for the time being.

Uncertainty is worse than bad news. It has been such a problem that I blamed it for the market lows of 2009 when I wrote that the bubble of uncertainty was about to burst on March 9th when the Dow was trading at 6500. Since that time, the index has rallied 1500 points and bank stocks have enjoyed a rally based on the details since released. On Monday, however, we entered a two week period of uncertainty ahead of the May 4th stress test results. Whenever Treasury Secretary Tim Geithner is in control, investors can expect stocks to sell off; and he is in control over the next few weeks. Geither’s track record does not look good and I expect the release of stress test results will mark his third strike.

Strike One

The Dow low of 6300 belongs to Geithner. His poor communication skills sent mixed messages to a market that was looking for a detailed banking solution that never came.

Strike Two

Geithner launched his PPIP program to deal with toxic mortgage assets before FASB released their ruling on mark to market accounting regulations. FASB’s new regulations eliminated the urgent need for banks to sell these assets and thereby made Geithner’s plan difficult and confusing to implement. He wants to use trillions in taxpayer money to solve a problem that doesn’t necessarily need all that money.

Strike Three

Geithner went back on previous statements by changing course on the stress test process. Geithner has taken his eye off the ball. Instead of using this as a regulatory tool to help revive the struggling banks, he is turning it into an investor tool to crush the weak. This is unneeded and appears to be his way of getting back at the banks who refuse to support his programs.

Strike three poses a major risk to financial investors. At a time when Geithner should just walk away and stop interfering, he is front and center once again. The punitive consequences for using his programs has caused the banks to do all they can to avoid the trouble. Obama’s hope that these executives would put the interests of our nation ahead of their own is too much of a contradiction. Instead of lending, the banks can’t wait to wash their hands of the money.

The taxpayer/government reward should be a restoration of healthy banking but apparently that’s not enough for them, they want to run the Treasury like a hedge fund and possibly continue the precedent of Citi (NYSE:C) by taking ownership in these banks. As long as this possibility exists, the SKF is the way to go.

Disclosure: Long SKF for a Quick Trade