Thursday, April 9, 2009

Bad News Keeps Getting Brushed Aside

Once again, some key bad news in the form FOMC meeting minutes are brushed aside in favor of questionable news around a merger of home builders and a potential bail out of insurers.

Its nuts, but that is the market we currently live in. Lots of rose colored glasses being warn. I think Jon Stewart is saving a lot of clips from CNBC these last few weeks as they are all saying all is fine, we are in a recovery and market will sky-rocket from here. Mr. Mustard Seed won't listen to any bad news and will spin it positive.

If/when the market does tank again and test new lows, I have to believe there will be a mass exodus of CNBC watchers since the network has totally betrayed their watchers by hiding the reality. The morning crew is OK but the afternoon crew refuse to allow anyone to say something negative about the economy and brush it aside. Then pile all over marginally good news.

But its all good as it creates inflated stock prices which provide opportunity. Am I a perma-bear. No, I am a realist. The Fed is now on the bandwagon that banks are worse off than we realize. The Treasury is recognizing that the banks will need more help. BAC is on the verge of collapse. Yet, no one cares on CNBC.

That all said, the VIX fell under the lower resistance line. I am not sure if that is due to uptick rule changes or if it is due to market conditions. We are still facing financial earnings season. It is very hard to say what they will show. Even if they surprise to the upside via some creative accounting, stress test results are also just around the corner.

Notice the treasury said they will hold off stress test results until after earnings. Do you think they would do that if the stress test results were good?

Given the move in the market today and the VIX action, I have to believe the market will be up tomorrow, at least early. I can't see it running though. I think until a major bank or major company has a big surprise on the up or down side, the market will stay flat and in a range of 815-835. Pretty narrow range, but it is only until we start getting more earnings reports.

Once stress test results are out, watch what happens. Many of the large banks will sell or spin off divisions. They will become smaller banks over the next 3-6 months. I think this includes BAC, WFC and JPM. Yes, I am adding JPM on my list of banks that are shortable.

Two key things about BAC and JPM. Look at the percentage of shorted shares. A month ago, there were 49M shares of JPM shorted. Now it is just 6000. Thats right. only 6K shares shorted of JPM. No chance of a short squeeze, so very little chance for JPM to go up. BAC in the same situation. a month ago, 111M BAC shares were shorted. Now only 53K. That is a huge difference and again, no chance for a short squeeze on BAC.

So, there ya have it. Watch for the market to go up tomorrow but probably good to sell long positions at the 835 area or go short at that time.

Shorts I like are BAC, JPM, AAI, VMW (may). I think transports are due for a pullback. Tech may get a hit if Intel or GOOG miss.

Good luck.


  1. "Notice the treasury said they will hold off stress test results until after earnings. Do you think they would do that if the stress test results were good?"

    Excellent point, Beamer Dog.

  2. "New York Times reported all 19 banks examined to determine their viability if the recession deepens will pass the review." (Bloomberg, 4-9-09)

    Roubini and others say top U.S. banks like Citigroup, BAC, and WFC are INSOLVENT, yet the latest rumor is that the market will RALLY because the top 19 banks will PASS the stress test.

    I guess the problems are "too big to deal with" directly and truthfully, so lies and cover-ups will try to play for more time.

  3. Time to eat humble pie and admit that your little VIX mean reversion model is broken. Come get long, its not "cool" anymore to short the markets, and SKF will be an artifact in a few months time.

  4. Erichter, I don't think the VIX indicator failed us. In fact, I think it was showing us that the market sentiment is more positive. It was not clear to me yesterday if the VIX was falling due to uptick or sentiment. But yesterday, with much worse negative news than positive, yet the market went up, it showed where sentiment is.

    Also, its not about being "cool" by being short. It is about realistic. Unemployment is going to 10.5% or so, GM will go bankrupt, banks will need more funding, commercial real estate will fall another 30%, residential real estate will fall another 15-20%.

    WFC news is great, no doubt. It is a bit confusing but it is good news for financials. But now everyone is expecting other banks to come through with the same news. If any banks warn or miss, todays financial gains will be wiped out.

    One other note, not sure why you mention SKF. I don't invest in SKF or FAZ. I have said it is not a good idea to invest in these right now and there are only a couple banks worth shorting right now.