The Week Ahead: Where's the Pullback?

It’s Sunday night, and the first thing I noticed is that there is no weekend bombshell that will affect markets.  Citigroup will try to raise more money, Bank of America will do the same, and Buffett fesses up to a tough year.  No shockers, no market movers.

And perhaps that’s indicative of the mood.  Basically, optimistic.  On Friday, the S&P broke – to the upside – the critical 875 support level. That doesn’t mean all clear, of course, but it does say that there is demand.  And the base built at 875 is solidifying.  Admittedly, the market could be getting tired of this upward push that began on March 9.  But many had given up on the rally a long time ago.  So everyday that the market doesn’t retreat is a victory for the bulls. 

This week brings the stress tests, to be released May 7^th.  For me, I always look at investing as a matter of probability.  So I ask myself, what’s the probability of the markets reacting well to the stress tests?  What’s the probability of the market reacting badly?  The government will try to say that the banks are in good shape, that is clear.  Some banks will need to raise money, and there will be a separation between the “good” banks and the “weaker” banks.  But beyond that, I couldn’t tell you whether  the market will go one way or the other.  At least, not with any degree of confidence.  So in other words, I’m not placing a bet either way.  For me, there is no trade in the stress tests.

Truth be told, I tend toward holding or a bit to the upside, for no other reason than we will have clarity, and the cloud of the stress tests will be over (at least for some time).  Clarity in itself is a positive for markets, and the only counterweight is that some banks will have to raise money.  That’s not new news, so that’s why I lean in the direction I do.   Still, I can’t see it being much of a trade. 

For the banks I hold, if the basis is below where it is today, I’ve sold off that position (I have shares above today’s price, which are held over from before the crisis.  Those I haven’t sold, and expect to hold for some time).  The only exception is Goldman Sachs, which I believe will do well in the stress tests, and with any luck, has a shot of returning the TARP money. 

The last month has also brought back a return to stock picking, and looking at the longer term.  Before, the entire market and entire sectors would move together.  Good bank, bad bank, it didn’t matter, the entire group moved together.  Now, we’re starting to differentiate among the banks, and you have to pick stronger ones and leave the troubled ones behind.  And that’s not only the banks, that’s the market as a whole.

I have said in my monthly article that I believe Visa and Mastercard will do well in the long run.  After trimming the outlook for the year, Mastercard took a bit of a hit on Friday after earnings, and dropped about $10.55 to the $172.90 range.  It may still decline, but I’m looking long term on this one, building a position, averaging.  To be clear, even if Mastercard doesn’t decline much in the next week or two, there will be credit card problems in Q2, and perhaps Q3.  Mastercard is a processor, and doesn’t extend credit, so it won’t have credit losses.  But its transaction volume may very well be reduced, so the company could report weaker earnings in Q2.  Still, it has a solid business model and good long-term prospects.  I like Visa, too,  but it’s had a bit of a run, and as a general rule, I don’t like chasing performance. 

I’m beginning to look at Boeing as well.  The company has been hit as all other companies, and has had a nice run recently.  In Q2, it still expects to have the first flight of the Boeing 787, the Dreamliner.  If it flies successfully, that will be a huge boost for the stock and it clears the way for years of sales.  So I’m looking for a good opportunity to get back into Boeing. 

And one more longer term play – IBM.  It recently re-affirmed guidance of $10 a share (or so) in 2010.  With a  12x PE, that would be $120.  Today, it’s at $104.61, and has been climbing quickly over the last week.  The bulk of IBM’s sales is service revenue, so that makes its income very stable.

And one other follow-up.  I’ve said that as the market stabilizes, money will come out of Treasuries, and that will drive prices down.  The TBT (double short Treasuries) was $45 last month when I recommended this trade.  Credit markets have improved, and today, it’s at $45.20.   There might be a pullback, but over the next year, the trend out of Treasuries should continue. 

I’m long GS and MA, and do not hold Visa, Boeing, IBM or the TBT.