NEW FINANCIAL “REFORM” ACT - QUICK BOOST FOR BANK STOCKS? ©Jerry Sears
We will very shortly see the “new” financial “reform” legislation in its best, compromise dress up gown, ready to be paraded in front of the gullible lambs (= voters). At that parade, legislators if they’re Republicans, will tell us how tough the legislation will be on the banks and, if Democrats, will say the opposite. But the people who really are responsible for this new bill, the lobbyists (= buying-off), will hide out of sight, not wanting to impair their huge fees by appearing in this public parade.
Few of the lambs realize that elections for both the House and Senate are so expensive that these noble lawmakers can’t succeed without payola (= big contributions). Since there are no term limits, legislators become entrenched because lobbyists arrange for legislators to get big chunks of this necessary payola. This is in return for legislative votes for this “reform” legislation. Then this “reform” legislation can be paraded in front of the lambs to get more votes.
Lest you believe this may be too cynical. Here are the words of President Obama, describing that process for this very piece of legislation:
"Over the last year, the financial industry has repeatedly tried to end this reform with hordes of lobbyists and millions of dollars in ads. And when they couldn't kill it, they tried to water it down with special interest loopholes and carve-outs aimed at undermining real change."
But wait you say, this isn’t about voting reform, as corrupt as voting may be. It’s about how investors and traders can make consistent money from this constantly corrupt state of government. To do this, the legislation has to follow the usual pattern of U.S. and state laws, and this one does. It has huge special interest exemptions (= loopholes) so while on the surface, it sound good to the lambs. But these “loopholes” make it difficult to ineffective to enforce.
There is another level of tricksters waiting for the arrival of this “reform parade”. They are money managers who run big institutional investment funds. They know about the loopholes, so when bank stocks become depressed they will buy them. Those stocks are now at about 50% of their 5 year highs. But will probably go lower after the parade because “smart” retail buyers will think that the “reformation” will be negative for bank earnings. Many will sell and/or short these bank stocks.
These smart(er) institutional money managers know that this “reformation” legislation is a joke and so will accumulate bank stocks at these low prices. Later, when bank earnings increase these money managers will, as they say, “make a bundle by dumping the stock.” What kind of assurances do they have that bank earnings will increase? There are two. First, they are assured that there will be big loopholes in the legislation.
The second assurance is that “enforcement” will be illogical and selective because it will be politically driven. Future lobbying will ensure that the criteria for appointment of “enforcement” leaders are political choices, rather than being based on merit, This supports the huge bucks constantly spent in this system to elect politically motivated compliant legislators, regulators, judges and Presidents … and so the cycle continues in the short term for big ROI, if you invest based on this certainty of continued corruption. The result will probably be oblivion for this country, but at least these investors will probably do quite well.
What’s the time period? It will probably be about 30 to 60 days for this legislative parade. Then it will be about another 30 to 60 days for the bank stocks to sink on “bad earnings projections” and then about another 30 to 60 days for the institutions to accumulate big enough cheap stock positions at low prices for those stocks to go up. In total that’s about 3 to 6 months to complete the results of this political scam.
The analogy is to investing in a mining stock where the value of the mineral (ie gold) keeps going up. The value from this political corruption does go up every election cycle as the ability to change results from lobbying becomes more widespread. Thus it’s like a mine whose ore keeps expanding. There are new rich veins discovered as it permeates into every aspect of this government, society and economy. In brief there are very few investment opportunities offering the same degree of surety. Why take a chance when you can invest in a much surer thing (=corruption)?
There are two different ways to trade/invest in this trend. If your investment vehicles are stocks, I would suggest bank ETFs. They probably won’t give the biggest returns that come from picking the exact right bank stocks … but they’re diversified. If you invest in options I would suggest calls and puts on these same types of ETFs for margin and leverage.
There are many bank ETFs. Their names are readily available from numerous multiple sources. You can buy the reverse ETFs for the down slide … picking any magnitude of movement you want (ie: 2x or 3X ) and long positions for the upside with the same magnitude of choices. You can also pick long or short options (calls or puts) to reflect the same pattern of expected movements.
Disclosure: no positions