On the Radar: Sherwin Williams

Not long ago, Barron’s came out with an article on Sherwin Williams (SHW) entitled, “Painting Over a Problem?”  In that piece, Barron’s argued that at a price of $53.55  (on Monday, April 13, 2009), investors were ignoring pending problems in the stock.  At that time, I hadn’t looked at the numbers yet, but the Barron’s article seemed fairly reasonable.  So it was curious that after earnings were announced on April 16, the stock jumped from $51.11 to $56.96 on huge volume – 8.1 million shares, compared to a more normal trading range of 1.5-2.0 million shares.   In fact, year-to-date, the only higher volume day was January 22, when Sherwin Williams missed earnings.  That day, the stock traded 9.8 million shares and fell from $55.42 to $48.20.  Afterwards, Barron’s re-affirmed its negative stance and so did others in the press. 

Let’s take another look at the numbers.  Sherwin Williams re-affirmed guidance of $3.00 - $4.00 EPS for 2009.  Consensus is $3.54.  At today’s (April 27) price of $58.25, that’s a 16.5x PE.  Historically, Sherwin Williams has traded at a PE of 12-16x over the last ten years.  That means the company is trading as if we were in the good times, as opposed to the uncertain bad times.  Using a 12-14x PE on consensus earnings of $3.54, a price of $42.50 - $49.60 seems more reasonable for the stock. 

Simply put, if you think the economy will continue to have problems through 2009, Sherwin Williams stock is ahead of itself.  Commercial real estate losses in the second quarter, combined with a potential inflation-driven rise in raw materials costs, could be the catalysts that drive the stock down. 

So why the big jump after earnings?  The only thing that I can think of is that investors expected the situation to be much worse.  So there was probably a huge short position, and those guys had to cover. Plus Sherwin Williams is a value stock (Buffett owns rival Benjamin Moore), and a good portion of those players who had dumped the stock after first quarter earnings decided it was time to get back in.  

At the time of this writing, Ming is long SHW.  

The Coming Week

I don't have much new insight for the coming week.  By all technical and

valuation indicators, we remain overbought.  Still, the bulls seem to hold,

and it seems unclear what would shake the bulls from the trees.

To be sure, the rally seems to be getting a little tired.  And yet, that

could simply be caution in front of the stress tests, which as of yet, have

not caused much stress in stock prices.  On Friday, amidst a fairly broad

rally in financials, tech, oil and consumer staples, Wells Fargo was up 6.5%

to $21.40, tipping past recent resistance levels.  As much as one might want

to say, "too far, too fast", the chart continues to look bullish.  Which is

not to say go buy, but to say that the market continues, at least for the

time being, to confound the naysayers.

Earnings remain the focus this week, and any leaks that may come from the

stress tests.  Officially, the results will not be public until May 4th, but

I'm sure the rumor mill will be buzzing.  CNBC has already said at least one

bank will need capital.  If that's a major bank, then that could stunt 

the bulls.  If it's a more limited regional bank, the bulls could hold.  

At the moment, I remain neutral.  Admittedly, I toyed with the buying the

SKF last week (shorting financials) ahead of the stress tests, but after

days of listening to not very substantive points of view, it seemed fairly

certain that most major banks would pass the stress tests.  Geithner seems

to want to stay close to his claims, which are that most banks are well

capitalized.  I'm also evaluating a quick play in GS and MS, on the thesis

that we will have a good bank / bad bank bifurcation.  Truth be told, my

conviction is weak, meaning that I can't give a high probability that such a

trade would work, and I'm looking to protect any position with a tight stop.

All in all, an oddly unclear direction (in the short term) in the market

after months and months of staring at certain downside. Longer term, I still

think banks will have problems in Q2, but that seems quite far away today.

I don't own WFC, but am long GS and MS.  

Stress Tests Cause Stress

So now we know the answer to the question, "Where's the pullback?"

It now looks likely that the stress tests could cause some stress, weak pun

intended.  Needless to say, Geithner has handled this badly, but it is what

it is.  We now have a situation where stress test results will be released

over the two weeks.  Apparently, the government will give the banks some

time, probably six months, to raise money.  To improve capital ratios, the

government may convert preferred shares to common, as in the case of Citi.

This could be a major problem for the weaker banks.  As long as there is a

threat of conversion, the weaker banks won't be able to raise capital - who

wants to buy with dilution hanging over their heads?  If the government

converts first, then that will dilute the common and drive down the share

price.  There is a possibility that the weaker banks could raise capital

after conversion of preferred shares, but the stocks of the weaker banks

won't be happy in the meantime.

So I am still researching the following possible trades:

1) buy AAPL on a pullback after earnings.  If more bad news is in the making

I will wait until the bad news clears.  The market is jittery, and any

significant bad news can take the entire market down.

2) GS and/or JPM, probably after release of stress tests.  Difficult to call

timing on this, but the basic idea is that the stress tests could catalyze a

pullback, then it would be time to buy GS or JPM, especially if they could

pay back the TARP.  I will wait on MS and WFC earnings to see where they

stand.  Bank of America has the cloud of conversion over it.

3) If conversion of preferred is likely with BAC, then there could be a play

in the preferred stock, just as there was with Citi.

The Week Ahead: Where's the Pullback?

Many are waiting for a pullback.  Many think it should have happened already.  And the case for a pullback is pretty strong. The fundamentals point to increasing loan, commercial loan and credit card losses in the banks.  The technicals say that the market is overbought and that we're very close to upward resistance.  And common sense should say that after more than 24% to the upside, the probability of down is higher than the probability of up.  

That pullback may very well come this week, as the busiest week of earnings, with more than 140 companies reporting, comes upon us.  There's not much possibility of surprises left in banking; Intel has indicated that tech is unlikely to lead to any market-moving surprises; and with the fundamental economy weak, it's doubtful that the industrials can lead the market higher.  

Still, the market has defied the naysayers for the last two weeks.  That includes me by the way - I positioned myself for a pullback two weeks ago and missed some really good upside.  And I'm not a alone of course.  Many have been waiting for the market to correct.  

I still believe that it's extremely difficult to call the exact top or the bottom, so getting close is good enough.  And the last two weeks are a reminder that the market often ignores our proclamations and confounds our expectations.  So it's worth asking - is there a scenario where the market keeps rising?  

In order for that to happen, I think we would need more good news over the next two weeks.  Earnings would have to be better than expected, and outlooks would have to be non-negative.  The stress tests would have to be non-events.  That is, the government identifies the weaker banks, we figure out how much capital has to be raised, and we DO NOT go into a panic thinking that major banks will collapse.   

Over the next couple weeks, just stabilization, the sense that things aren't collapsing, the sigh of relief that says the worst is over and we can move on - this is enough, I think, to move the markets up, or in the worst case, lead to a shallow pullback.  If we can get that sense of safety, then the money on the sidelines would come in and help move the markets upward.  

How likely is this scenario?  Very hard to say.  For me, the stress tests are a bit of a conundrum.  If there are major banks that need lots and lots of capital, then wouldn't the bear attacks just start all over again?  The truth is, we have to face the possibility that the stress tests might lead to the exact result that they were intended to prevent - an attack on the weakest banks. At the least, the market likes to worry.  Give the market a reason to worry, and it will.  

What does that mean for the investor?  I think you have to position yourself for the downside, but be prepared to move if we see possible upside.  This market wants to move up, and at the very least wants stay up.  The coming catalysts could move things either way.  I've been positioned for the downside by being on the sidelines for the last two weeks.  

Two other things to keep in mind over the next couple weeks.  First, we have begun to differentiate between the stronger stocks and the weaker stocks, especially among the banks.  So far, Goldman Sachs and JP Morgan are among the strongest, and any pullback should be considered a buying opportunity. 

Second, we may still have to face serious problems in Q2, and potentially in Q3.  Those losses in loans, commercial real estate and credit cards aren't going away; all the banks have said they expect these losses to increase.    The consumer remains weak and will be so for some time.  There's a real possibility that the gains of this first quarter will wane, and that losses will increase.  That's a very bad formula for Q2.  

By the way, there's also some specific trades on the horizon.  Apple reports this week.  Apple typically sells off after earnings, because the company blows always the earnings and then gives really conservative guidance.  I would look at any pullback as a buying opportunity because Apple is expected to have new iPhone models in the summer.  

FYI, I am long AAPL, GS and JPM.  

The Shape of Things

Well, we now have a decent sense of earnings season. Banks did better than expected. Where to from here?

There's not much left in terms of potential surprises. We have Citi reporting tomorrow, and if the last few weeks are an indicator, Citi should do well in its lending and should surprise there. Writedowns remain a question. Also, tomorrow is options expiration, and given the heavy shorting in Citi, there's going to be a lot of short covering pressure. That says Citi should pop tomorrow, but the traders know this, and are getting ready to sell into any pop. For me, not much of a trade, because I can't sell faster than the guys on wall street. The traders will sell seconds into the open after earnings. I think I'll pass.

That leaves Bank of America. Again, they could do well because they have capital markets and lending exposure. Writedowns remain an issue, but if they used purchase accounting with Merrill the way Wells Fargo did, the worst of the Merrill writedowns might be past. That leaves loans, commercial real estate, and credits cards, where losses should be up. JP Morgan confirmed as much today. Still, they may make up for those losses by making money lending and in investment banking, like Wells, JP Morgan and Goldman.

So the question is whether Bank of America's run up to the $10 range is as far as it will go. It could be like JP Morgan today, where today's positive earnings led to negligible movement in the stock; it may have run as far as it can go for now. If you want to be really aggressive, there could be a small play in buying Bank of America ahead of earnings, and selling at the close before earnings. If Citi does well tomorrow, Bank of America could have a small pop, and at $10, small pops could be a decent percentage. Not worth a huge bet, but a possibility if your gambling bones are itching.

And finally, we may have a bit more information when Wells Fargo reports. We'll know about Wells' write offs. But there shouldn't be much new news there, and if anything, downside risk is higher because the quality of earnings could be weaker than expected.

Morgan Stanley also reports next week, but no one expects Morgan to do anything market moving. The best results are out, and Morgan, as mentioned, has commercial real estate exposure that will ding earnings. But that's about it; not as strong as others, but not bad is the expectation. In other words, not much of an event for the market.

After this week, there's not much in terms of upside surprises that are possible. Plus with options expiration, everyone will reposition next week. Right now, I think resistance is around 8,000 on the Dow, 850 or so on the S&P. I've heard people say 900 on the S&P, but every time I look at the charts, 850 seems to be the battleground to me.

The remaining known event that could move the market either way is the stress tests. Given what we know now, which is that the stress tests will tell us which banks are weaker and will give us a capital plan for helping those weaker banks, the release of the stress test results could actually be a positive. That's because we'll have clarity. It's now unlikely that many banks will go to zero, or that the government will let them do so. And a situation like Citi where the government converts its preferred shares to common and massively dilutes the common seems unlikely. The banks that have reported are in decent shape, Morgan Stanley should do fine, Citi's future has already been decided, leaving Bank of America as the last big bank that could face such a fate. There could be pluses in Bank of America's earnings, and there's no indication that it could be a disaster that warrants the government converting its shares from preferred to common.

So consider this additional possibility: the government recently flip-flopped, deciding to release results of the stress tests, where they had previously decided they would be mum about the results. One reason to release the results is that it sets the stage for banks to repay the TARP. As we know, certain banks have been clamoring to do so. If the government gives them the green light post stress test, Goldman and JP Morgan will pop, they're just itching to execute the wire transfer. Wells and Bank of America have had similar rumblings, while Morgan Stanley has said it might be several months. Regardless, if banks start repaying the TARP, the market should pop.

The other possibility is that we could get a sell-off and correction. For the most part, the banks, to date, have held their gains. So that argues for a shallow correction.

Is there a scenario with significant downside? We would need major bad news, which at this point seems unlikely. There is a possibility of a down leg in coming quarters if bank revenues aren't as high but losses continue. At this point, it's a possibility to keep in mind but not necessarily something to bet on.

One other theme. It's time to come back to stock-picking and medium or long-term investing. We are stabilizing, barring any major down legs in the market. The more we settle, the more the trader's market will recede, and the more the longer term investor returns. And yes, it's a great time to buy for the long term.

That's if for today,

Ming

Wells Fargo and the Week Ahead

So, interesting week. Here's my current thoughts on the market. Please keep in mind that the trading notes are meant for short term traders, not longer term investors. And these are just my opinions given my investing style, please consult your own financial advisor before investing.

Obviously, the big event of the week was Wells Fargo (WFC), and what that means
for the rest of the market. Wells announced record profit, much to the surprise of investors. That helped send the Dow up 246.27 to 8,083.38 on Thursday. Wells itself was up almost 32% to $19.61, in a day. Needless to say, the day was very bullish for the other banks.

I still remain cautious and haven't put any money in the market in the last week. I can go over the reasons to question the Wells Fargo announcement, but the fact of the matter is that the market wants to go up, and yet conditions remain overbought. At the
end of the day, I can't give you a high probability that the market will go
up or down in the short term. I think in the longer term it will have pull back and correct. Still, earnings could pull things either way, and probably the only certain trade is a straddle (meaning you by options both ways, up and down, and one of them will work).

Longer term I think we're headed toward stabilization, so over the next
month, it's time to start looking at medium- and long- term investments, and it may be
time to shift from being a trader to actually looking at fundamentals -
i.e., which companies will start recovering first. Right now, I'd put the
probability of retesting the lows at 25%; a 25-50% retracement (meaning
25-50% of the 21% gain in the last few weeks) as 70%; a continued uptrend
without a correction at 5%. I'm putting out the numbers just as a ballpark,
of course, and these estimations could very well change quickly.

On the Wells situation, it's very like that during this quarter they were the
beneficiary of one-time effects, including:

1) the combined markets shares of Wachovia and Wells
2) purchase accounting, which requires them to write down assets to fair
market value. This means that the December write down would have been the
biggest, with less this quarter.
3) low interest rates, which drove mortgage originations and refinancings in
the quarter, plus huge spreads (they're making in the range of 4.1% on every loan - that's their net interest margin)
4) FASB 157x, which will affect securities, and may have allowed them to up
valuations relative to December, and reduce the reserve for loan losses.

Whitney Tilson, the value investor from T2 partners, said this week that the
revenue line was not the surprise for Wells. The bank's pre-tax provision profit came in exactly in the range expected, of $8-10 billion (actual was $9.2 billion). The
real surprise was that the reserve for losses was only $3.3 billion, compared
to $6.1 billion in December.

Why is this important? It just says that in the short term, the results
from the other banks can be very unpredictable, and positive surprises are
very possible as I mentioned in my note earlier this week. It also means that longer term, in Q2 and Q3, there will be more write downs and more reserves, and post stress test,
capital raising will probably be necessary. I suspect Wells, given it's
positive aspects this quarter, will eventually push for capital raising to
stabilize its situation.

Over the next week, key earnings reports will be Citigroup, GE, and Goldman Sachs. Again, I can't give you a high probability that things will be up or down on any of them. Positive surprises are very possible, and even not as bad as expected will be a good thing.

Goldman is likely to have a good report. They are thinking about a stock
offering. It stands to reason that they wouldn't be talking about a stock
offering unless they expect a very respectable report. If so, there may be
a play in the offering. A stock offering will dilute the shares, driving
the price down. Once the offering is done, expect the shares to rise again,
especially if the subscription is strong (which I would expect it to be).

Other reports this week are Intel, where I don't really expect much, because
I doubt that the computer market has turned the market yet; Sherwin Williams (SHW), which again, is unlikely to indicate that housing has turned; and same story for CSX. These are all demand-related stocks, and anything not as bad as expected is very good. Still, don't see a trade here pre-earnings - meaning that it's hard to predict either direction with any great certainty.

Those are the thoughts for the weekend. Have a great Easter.

By the way, I am long C, GS and SHW.

Why You Should Avoid the USO Right Now

Tuesday, April 7, 2009 - 6:35 PM PST. Some time ago, a friend of mine was buying the USO as a way of playing oil. Turns out, the USO didn't quite track the price of oil. She asked me about it, but at the time, I didn't know why. Now I do.

So let's start with the facts. West Texas Intermediate (WTI) Crude was $46.34 per barrel on 1/2/09. Yesterday, on 4/6/09, WTI was $51.05. That's a 10.2% gain. In contrast, the USO has fallen from $35.63 on 1/2/09 to $30.23 yesteraday. Year-to-date, that's a 15.2% loss.

Why does this happen? That's because the USO doesn't actually trade crude oil, it trades crude oil futures. That's a whole different story. You might think that the USO takes your money, buys a barrel of oil, and then sells it later. Fact is, the USO trades futures, which are actually a derivative. It's like trading options, rather than the underlying stock. Like options, those futures expire. Because of that, the USO is constantly buying new futures contracts. If you think that costs more money, the answer is yes, it does.

In periods when the price of oil is expected to rise (called "contango"), longer term futures cost more the farther away they are in time. For example, today, the May '09 contract costs $48.18; the June '09 contract costs $51.08, and the July contract costs $53.57. The USO has to keep rolling forward its position in order to stay invested, but as you can, it becomes increasingly expensive to do so.

It makes sense then, that the USO should do well when the price of oil is expected to decline, a situation referred to as "backwardation". In this case, the price of futures contracts decline with time. So as the USO rolls its position forward, new contracts became cheaper, resulting in greater gains.

So for as long as we have contango, the USO can be expected to under perform relative to the price of crude. This applies to other similar ETFs. Before investing, you should read the ETF's prospectus carefully.

Differentiating Among the Banks for Q1 2009

Tuesday, April 7, 2009 - 1:00 PM PST. This morning, a friend of mine emailed, saying that the market has underestimated how much trouble the banks are in. He wouldn't be alone, of course. Mike Mayo, the esteemed Deutschebank analyst that recently moved to Caylon, came out with a bearish note yesterday on the eleven major banks. The market sold off a bit, but not significantly, so the market seems a bit more optimistic then either my friend or Mike Mayo - at the moment.

I think they are basically right, but it's important to do two things: (1) differentiate among the banks; and (2) separate the trading world from the real, or fundamental world. Yes, those are two different things, I would say.

For now, I'm am dividing the banking world into three groups: (1) the investment bankers - GS and MS, who are technically banks but really aren't lenders; (2) the large-scale commercial banks with an investment banking component; and (3) the traditional lenders.

The Investment Banks. The investment bankers should do well as we approach earnings season. Consider first that most of Goldman's and Morgan's competition is gone, and fees for their services have gone up. These firms have also written down a large portion of their securities, so the FASB mark-to-market changes could actually allow these companies to write-up some of their securities. Worst case, they will probably take the opportunity to reduce additional write-downs. The public-private partners could also help these banks. If the TALF transactions occur at a price higher then their previous marks, theses guys could, again, write-up their assets. Finally, consider that they have low exposure (relative to other banks) to the pending problems in loans, credit cards and commercial real estate loans. Trading-wise, there's less of a case that the market has underestimated the impending losses in GS and MS.

The Commercial/Investment Bank Combinations. Then you have the major banks with an investment banking component, such as JP Morgan, Bank of America, Wells Fargo. The securities side should do well for the reasons mentioned above. And for them, mark-to-market could be of some help. The FASB changes, known as 157-x, apply in June, but banks have the option to enact these changes as of mid-March. Since it takes substantial modeling capabilities to make these changes, it's expected that only the large banks can make those changes in time for Q1 2009 earnings.

Also, these banks have been the beneficiaries of substantial government help. Not only in terms of direct financing, but also through programs such as the agency paper trade. The Fed has bought $250 billion of low-interest-rate mortgages guaranteed by Fannie Mae and Freddie Mac. This has driven up prices of these securities, leading to significant gains for them. Meredith Whitney estimates that total gains might be as much as $5.6 billion, with $1.6 billion for Bank of America and JP Morgan.

For these banks, it's the loan, credit card and commercial loan side that could be a problem. Mike Mayo estimates that on average, loans have only been marked down 98 cents on the dollar. Meredith Whitney estimates that real estate prices will drop 50% peak to trough, while consensus is only 40%. Whichever way you want to dice the numbers, the short story is that there's a long way to go down on the loan side.

So here, for these major banks, the picture is mixed. You have some pluses, and some minuses through earnings seasons.

By the way, Citigroup falls into this category, but it's stock is also in its own category because of an impending conversion of the preferred shares to common. That keeps the stock from moving freely.

The Loan Driven Banks. These banks could will have problems, not only in the next month, but also for the next several quarters. USB is an example: it's a conservative bank with high loan quality, and it avoided a lot of the derivatives investments that got so many other banks in trouble. They're a traditional lender. So while they've been risk adverse, it won't save them from the coming loan problems.

Small and medium size banks will also be at a disadvantage for a couple reasons. Unlike the larger banks, they won't have benefitted as much from government programs. Also, they probably won't apply FASB changes until June. And finally, they're less diversified, and won't have revenue from capital market operations.

The Trading World vs. The Real, Fundamental World. So we have a situation where we could get some positive news for the banks during the first quarter earnings season. And keep in mind, the news has skewed toward capital markets issues that affect the largest, most visible banks. Loan issues have gotten much less airtime, and the banks haven't dealt with these problems as much. That means the short term could be positive (and remember, not as bad as previously thought is positive in this market), while the fundamental, real world trend is probably down.

Trading Implications. I'm still on the sidelines for the moment. Because of all the rule changes and government programs, first quarter earnings may very well be more positive than expected for the banks. I think the greater "danger" area now lies at the end of April, when the results of the government stress tests become known. The Obama administration recently announced that they would wait for the first quarter earnings to be announced before revealing the results of the stress tests. So we have a possible scenario where Q1 earnings might be okay - or even slightly positive, but where end-of-the-month stress tests could throw some icy water on the market. Second quarter could also be a problem as more loans are written down.

All in all, it remains a trader's market. I do think we are more stable, and that is always a plus for the markets. Still, it's not a green light. The next few quarters will be very mixed, sometimes up, sometimes down.

Just Hangin'

Tuesday, April 7, 2009 - 8:10 AM PST.  So I'm just hangin' out, waiting to see which way the market goes.  I still think there will be a pullback, but how much is very hard to tell.  It could be shallow, it could be 10-15%.  At the moment, a retest of March lows seems less likely, but that could change.  

It may sound wishy-washy, but I think those are the real possibilities.  The market doesn't want to sell, but will if the news makes it nervous.  And the VIX is still above 40 - meaning that volatility is still here, it hasn't gone away.  So at the moment, I'm on the sidelines.  Hmm... what else is on TV...

Looking Forward

So we've had a rally.  Of course, the reigning question is, how long will it continue?  Should we stay invested?  Take profits and leave some in the market?  Or sell everything?  

I chose the last, sell everything.  Or rather, sell everything that I had bought within the last few weeks - that is, everything purchased during the current rally.

I do this being fully aware that many say the rally has legs and will continue.  Truth is, there is no way to be sure which way the market will go.  We can only assess the probabilities.  For now, I see the probability that we will pullback as fairly high.  Even if I am wrong, the right decision (for me), given the information I have at the moment, is to sell.  

And know that this not a bear call.  It's simply a trading call - that it's more likely that we will retreat, for the moment, than advance.  

So here's my rationale.  We'll start with the technical, since it's the most straightforward.  If you look at a chart of the Dow, we're sitting right at near-term resistance of 8,000.  If you look at a chart of the S&P, we're at near-term resistance of 830-840.  

What about the fundamentals?  Although we've had better than expected news, the major fundamentals haven't changed.  The consumer is still weak; unemployment is expected to be high; commercial mortage delinquencies will be hitting companies' books; credit card loses are looming.  First quarter earnings begin next week, and hard numbers will come out.  

Today, an analyst downgraded Morgan Stanley, which was actually weak compared to the other banks.  The analyst actually predicted losses in the first quarter, and that held back the stock.  Is this a sign of things to come?  

And what about other indicators?  Credit markets haven't significantly improved.  The spread of corporate debt over Treasuries remains nearly 400 bps (4%).  The VIX remains above 40.  

The government stress tests still loom, and whether the public-private partnership will work remains to be seen. 

In other words, significant uncertainty remains.  We have not isolated or fire-walled the problems in this economy.  And after such a run-up, a breather and a pullback is very, very likely.  

The FASB 157x Trade II: Buy the Rumor, Sell the News

So today, FASB announced that 157-x, the mark-to-market revisions, were approved.  There were two parts, and the first was approved at 9:30 AM EST, and the second at 10:30 AM EST.  For the most part, the financials were up pre-market.  Not long after, at 10:30 AM EST - when the second vote was announced - the financials sold off.  In case you're curious to see more detail, see the charts for Bank of America, Citigroup, Goldman Sachs and US Bancorp. 

This was a classic "buy the rumor, sell the news" trade.  If you read my articles, you'd know that I'm always interested in what we can learn for the next time.  So here are my guidelines for this kind of trade:

- the trade is well-known in advance

- there is a definitive event or moment where we know "yes" or "no"

- buy several days before if you can (in this case, monday afternoon or tuesday morning would have been best)

- sell immediately before the decision, or at the latest when the decision is made

In this case, the financials recovered from the "sell the news" sell off.  That's not true in every case.  So best to sell just before. 

I bought several financials on Tuesday, and this morning, sold off everything I had bought on Tuesday.   

The FASB 157x Trade

Thursday, April 2, 2009 - 12:03 AM.   Much is being said about tomorrow's mark-to-market (let's call it M2M for short).  I think it's likely to pass.  And I think it will help banks, although it will not be a cure-all by any means.  

I can't see FASB blocking FASB 157-x.  Many blame M2M for the current crisis, and the political pressure is high.  If FASB votes against 157-x, the backlash would be severe.  Plus bank stocks would immediately drop, and that would only add to the reaction.  

Still, FASB 157-x isn't a panacea.  When faced with the M2M controversy, FASB actually argued that they had drafted the proper rules, but that people had applied them improperly.  If that is the case (that's a big if), then the most generous interpretation is that the rules were very vague.  That led the accountants in the field to be conservative and to mark down assets to firesale prices, fueling the current crisis.  It's possible that even if the current FASB 157-x is passed this morning, then it could be equally murky, and the result could be almost as imperfect.  

As for the actual impact, estimates have run as high as a 20% increase in earnings for a company such as Citigroup.  Definitely a plus, but probably still not enough to save Citigroup from effective government control.  

Ironically, FASB 157-x is anti-Geithner, which explains his aversion to M2M changes.  Let's say a bank is asking 60 cents on the dollar for an asset, and the buyer is offering 30 cents.  Geithner's program subsidizes the buyer, so with the program, the buyer can offer 45 cents.  Geithner's hope is that a bank will come down to 45 cents, buyer and seller will find a mutually agreable price, and a sale will occur.  This will take the assets off the banks' balance sheets.  

M2M will allow banks to have higher marks and to hold assets longer.  So now the banks might mark that same asset to 70 cents rather than the previous 60 cents.  In that case, they may only be willing to go down to 55 or 50 cents on the dollar while the bid remains at 45 cents.  So M2M actually threaten's Geithner's plan.  

So what's the trade?  Well, I bought ahead of today's decision.  I think there will be a bump, the question is - how much, and how long.  On something like this, it's just best to run all the outcomes, be prepared to move, and exit if necessary.   

A Little Window Dressing

Wednesday, April 1, 2009 - 1:15 AM. So today's market caught people by surprise. Most expected Tuesday action to follow Monday's 254-point on the Dow. Instead, the Dow ended up 86.90 today, and at one point the market was up almost 200 points.

I would think that today's upward move was simply end-of-the-quarter window dressing by funds. That means funds that had been sitting in cash wanted to be invested at quarter end. Many of these funds want to show that they're in the market. Otherwise, investors might say, why should I keep my money with you?

So the upcoming catalysts:

1) I expect mark-to-market, if there is any relief, to be a positive on Thursday, perhaps Friday.

2) The G-20 meets on Thursday. Lack of action could be a negative for markets.

As I mentioned yesterday, I am playing some banks going into Thursday's mark-to-market decision. Still, I would be cautious because sentiment for financials are negative as we enter the Q1 earnings season. Also, many of the banks have had run-ups recently. Some are still near their recent highs, while others have given back some territory. So I'm playing the banks that have had a bit of a pullback.

Sentiment for oil and commodities are also negative going forward. Whatever drove the commodities rally in recent weeks has probably run its course. OPEC can't keep cutting production to drive prices up, and more money has to come into the market to keep pushing prices up.

Earnings season starts as soon as Monday, so we won't have much time before the market starts swinging all over the place. Generally, people expect Q1 to be very weak.