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Monday Morning Quarterback: Can Banks Lead Tape Higher for a Trade?


As go the piggies, so goes the poke.


By now, you've no doubt caught wind that the markets are in a bit of a funk.

Financial institutions have solvency concerns (old hat for ye faithful), unemployment is on the rise (Caterpillar (CAT) shed 20,000 jobs this morning and Home Depot (HD) added 7000 pink slips), the consumer is on the ropes and despite massive government intervention, equilibrium between asset classes remains elusive.

At the beginning of January, we tossed out ten themes that could conceivably play through in 2009. Nestled in one of those nooks was the view that we'll likely see "motion and movement" that included an equity nadir of S&P 600 and a few rallies of 20-25%. In terms of timing, the following view was shared:

"The January 20th transfer of power is an important inflection point, for if we can collectively navigate past that date without geopolitical conflict, stocks have room to run into March or April, when the bloom begins to fade on the new administration's rose."

Now, I see what you see in terms of our mainstay metric assimilation.

The S&P, NASDAQ and Dow Jones Industrials continue to trace out classic churning patterns, working off their oversold condition as a function of time rather than price.


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Fundamentals, with the exception of several high-profile tech stocks, have been somewhere between fugly and nosty.

Sentiment and psychology are as bad as I've ever seen as social mood shifts and risk appetites contract.

Structurally, the disconnect between credit and equities continue as currency-the release valve in this equation-is caught in the crossfire.

As a trader, there are certain guidelines-commandments, if you will-that we must adhere to if we are to prosper in this profession. At the top of that list is our oft-stated "discipline over conviction" mantra, which has saved my arse more times than I care to remember over the course of my career.

I bring this up in the context of my current stylistic approach, which includes trading from the long side in the financials and operating through the lens of "hit it to quit it" on tertiary market exposure.

Over the weekend, National Economic Council Director Larry Summers noted that soon after Tim Geithner is sworn into office, the new Treasury Secretary will unveil the Obama administration's plan for stabilizing the nation's financial infrastructure. There are no magic pills, we know, but the mere specter of change should lend a bid to the banks, if only for a trade.

While debate continues regarding the merits of any proposed "solution"-an aggregator bank or an RTC-style repository-the "goose egg scenario" for equity holders is outright nationalization, an option that the incoming Treasury Secretary says he "flatly opposes."

Couple that with last week's insider buying by JP Morgan (JPM) CEO Jamie Dimon and Bank America (BAC) head Ken Lewis-I'll bet anyone a finski that it wasn't a coincidence they dipped their wick on the same day-and the seeds of a counter-trend rally could be sowing.

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Positions in C, BAC
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