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Get Ready for a Monster Move in the Market


A binary event awaits the financials.


As a follow up to this morning's syndicated missive--and as a function of my current risk profile--I've spent some time this morning discussing the prospects for financial equities with my fellow Minyanville professors. The question at hand is: How would banks react if all dividends were suspended?

Professor Sedacca weighed in on the Buzz by saying, "If you really wanna put your foot down, eliminate the dividend payments. Now. Beware those that are long."

Mr. Practical, in an offline conversation, reiterated those concerns. "Equities are an option on profits. Dividend cuts indicate profits are going away. Based on the still incredible liabilities at banks (and no profits) the equities remain extremely risky."

Minyan Peter wrote, "I believe that the price action we have seen over the past several weeks has largely incorporated this - at least as far as common dividends go. To me the question remains whether the Treasury has the courage to suspend dividends on the non-cumulative preferreds. As you know, I believe that those too should be cut."

Professor Pepe Depew offered, "Look at Goodyear Tire (GT) going back to 2002 and guess when it eliminated its dividend (the answer is February 2003). I agree that the company has got long-term issues but it will rally on the news first. Financials across the entire spectrum have (or are nearing) DeMark buy signals on the daily charts. The "investment" is to sell the banks and walk away. The "trade" is to buy the dividend news first."

As Minyans know, I've been bearish on the banks for years--while positioning for a counter-trend rally on the Bear Stearns news (23% lift for the sector), mid-summer (48%) and November (47%)-- and recently posed the question "Will The Banking Industry Survive?"

In the interest of full disclosure and forthright communication, I currently have positions in Citigroup (C), Bank America (BAC), Wells Fargo (WFC) and Morgan Stanley (MS), which I've "traded around" since before their initial 26% six-session sprint that began three weeks ago (and yes, during the subsequent 15% pullback).

The question, quite naturally, is "what now" as we await the "package" from the Beltway. My gut, for what it's worth, is that this complex sees a meaty upside trade in the near-future, part of the "rally window" we discussed that exists between January 20th and when the bloom fades from the Rose Garden.

That, in my view and if it is to occur, would be a pure trade as flags are thrown at off-side traders (the hate in the marketplace is palpable). The financial landscape will be much thinner and austere for years--and yes, many of these stocks will go to zero--but the destination we arrive at pales in comparison to the path that we take to get there.

The trick to this trade--and by trick, I mean risk rather than edge--is the binary nature of the announcement. In other words, we'll walk in one day next week and the sector, as a whole, and the market, as a function of that price action, will be demonstrably higher or lower depending on popular perception of the package.

For my part, I've reminded myself that discipline must always trump conviction and while my gut screams higher, the mechanics of the swing will trump the results of the at-bat. As such, I've slapped tight trailing stops on all my financial exposure and will take the journey one step at a time. Profiting is a privilege rather than a right and it's a privilege I would like to keep, thank you very much.


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Positions in MS, WFC, C, BAC
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