Thursday, April 9, 2009
WFC announcement
Credit markets have generally been decent over the past few weeks and it sounds like the 19 banks under the "stress" test (not that much of a stress) will pass the test. Add to that the news from WFC today that they will blow away consensus expectations for Q109 and the short covering rally is on today. Liquidity will be low in the market given the holiday tomorrow so it will be more extreme than it should be. It will be tough to be short the financials group through earnings season given that this WFC trend should also benefit JPM, BAC and PNC. This should give a general lift to financials overall since this is one of the most hated and therefore underowned groups out there. This should be a broad positive for the markets overall as well. However once earnings season is done (mid May) I think we are in for a market pullback given that the Fed/FDIC will push the banks that need more capital to get it and we may have another GM like boot out of a bank CEO, Pandit at Citi? The push for more capital means the conversion of government preferred to common and that will dilute the heck out of the common shareholders. In addition there will be arbing to short the stock of the bank who will have preferred converted into common like we saw with Citi. I would ease up on WFC, BAC and C here and then come in after earnings season to put the shorts back on them. Good pair trade is to use JPM as the long.
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Awesome analysis Jay. I read something written by Meredith Whitney who agreed with you. she has been extremely bearish banks, but said last week to avoid them until after earnings and stress test results.
ReplyDeleteI also believe that many companies will be using their newly appreciated share prices to raise new cash in new issues of shares. This is dilutive, but since credit is difficult to get in this environment many businesses have little options remaining. This will put downward pressure on equities in the future.