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Bank on this Rally?


Why financials won't bounce like the tech stocks of yesteryear.


Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial). It's being shared here for the benefit of the Minyanville community. See also Make or Break for the Market.

I was speaking with President Fish at our ExCo breakfast this morning (please read his astute take on digital media) and he asked me what the difference was between the Citigroup's (C) and Bank America's (BAC) of the world and the Apples (AAPL), Ciscos (CSCO) and Intels (INTC) after the tech crash. "These companies aren't going away," he said, "why isn't this the exact same thing as buying tech after the wreck?"

As soon as I swallowed my egg white omelet---people who talk with food in their mouth is one of my mainstay pet peeves--I responded "three reasons, off the top of my head."

  • While big cap tech sold millions of puts in lieu of stock buybacks (through a tax loophole, no less), they wrote off those losses when their stocks broke strike (and they were put equity at higher levels). Banks, for their part, are tied together with hundred of trillions of dollars worth of derivatives and it's a much stickier situation without a one and done solution.

  • Big cap tech chewed through capacity and inventory. Banks continue to hold toxic assets in the form of residential real estate and the commercial side of the equation looms large on the horizon.

  • While the Street cheers Bank America and others for successfully raising capital (reducing insolvency risk), it comes at a significant cost to equity holders as water is poured into a diluted pie. These companies will "be around" but many of them will be shadows of their former self. Fannie (FNM), Freddie (FRE) and AIG (AIG), among others, are proof positive of that point.

That certainly doesn't mean the sector can't rally--remember, we were bearish on the bunch into BKX 120--but there are no panaceas or magic pills. I would simply ask Minyans to remember the distinction between trading and investing and not fall in love simply because everyone else is enamored. Remember the game theory scene in A Beautiful Mind? Sometimes, it pays to play the odds rather than chase the blonde.

Some Random Thoughts:

  • The action that jumped out and bit me on the opening? Goldman Sachs (GS). Zed's red, baby, Zed's red.

  • On the other side of that ride is Bank America (+8%), which has been the single best tell for the broader tape of late.

  • My friend Snitty offered me a ticket to the comedy review last night on Broadway featuring Conan, Leno, Seinfeld and others. I passed as I was knee deep in the final edits of Memoirs, which kept me in front of my computer until 2:30 AM. Nice balance, eh?

  • As discussed into yesterday's closed, I pared my short-side risk as a function of discipline and entered today with stems and seeds in front of my vacation (which begins tomorrow). Inherent in that is that I've got some negative bets on (always honest) and while I plan to be gone but not forgotten by the time I board my flight, I faded (sold) the opening for a quick shnitz and some tight stops.

  • If we don't see some degradation in the next hour or so, I'll likely whisper "good traders know how to make money but great traders know how to take a loss" and further pare my fare. I can battle with the best of them but I know, as do you, that a war awaits if and when the tape scrapes S&P 950.

  • It's awesome to see Professors Rob Roy and Tom Fant weigh in on credit from their perch at Atlantic Advisors. In true Minyan spirit, they're very good at what they do and better at who they are.

  • There's been a lot of chatter about how the VXO is moving back into a "historical range" and signals clear skies ahead. That's certainly within the probability spectrum. My take, for what it's worth, is that the more people who believe that risk of a "tail event" is removed, the more likely that outcome becomes. Remember, the greatest trick the devil ever pulled was convincing the world he didn't exist.

  • Minyan Kingsley observes "Yesterday marked the one year anniversary of the March 10th-May 19th 2008 bear market rally. Also, in the 2000-2003 bear market, the first rally failed on May 22 at S&P 1309, 1.7% shy of the 200-day moving average (before falling off a clip to the September 2001 low) and the second bear market rally attempted to challenge the 200-day moving average and fell 2.7% shy (before reversing)." As it stands, right here right now, the S&P is 2% from the 200-day moving average.

  • Vintage Minyans know Bill Meehan, my buddy who was taken from us on September 11th. Many of you also that his son, Billy, works with us at Minyanville running our premium products group. I share this as Mama Mo prepares for her annual cancer walk as she continues to battle this horrible disease with strength and determination. We're a community so please know that I share this fare for those that care.

  • A quick shout out to Ruby, Joel, Bill, Bennet and Zoë as I remind myself of the difference between loss and loss. I'm a better man for having each of them in my life and that's a blessing I remain thankful of.

  • I can list a handful of things I truly love. Rainbow cookies are atop the list. Sweet potato fries are up there too. And trading has always been a passion. I can say with a high degree of confidence that I will not miss that latter matter when I take this upcoming break from the tape. That has nothing to do with performance and everything to do with balance. Work to live, don't live to work.

  • Good luck, Minyans, and remember that profitability begins within.


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