The Credit Crisis Financial Stocks Short Journal

Citigroup (C) is reportedly ready to start a $58B stock swap that was delayed last week, now that the FDIC backed off its public questioning of CEO Vikram Pandit's leadership and the Treasury signaled it will sign a final agreement to take a 34% stake

 

And what does that say about anything going forward?Look at the VIX tumble and this rally, every investor, their mothers and their wifes dont expect a Lehman metldown again, what does that has to do with 10K Dow?

On a valuation basis the market is getting quite expensive, on a technical basis I'm told it is overbought. I posted about a study showing that the final low of a bear market gets tested 86% of the time, it looks like the correct number is something like 50-60%, so there is better than even chance of a low testing on historical basis alone, factor in the horrible fundamentals(such as banks not earning net money for the next 18 months) that is not priced in, irrealistic GDP expectations, a nonsensical 'inflation' story for the short-term and it looks like the stock market is in for a lot of surprises in the next 6 months(which will include the worst historical two months for the stock market Sep and Oct)
Stocks are up 40% and people still want more, go ahead and argue 'Dow 10k because the idiots will keep buying' but dont try to justify on ET Dow 10k on anything other than momentum. Btw, I heard OJ's lawyer quit

 

Under Citigroup’s plan, as much as $25 billion, or about half, of the Treasury’s preferred stake in the bank will be converted into common stock. More than 17 billion shares may be issued to the government and other preferred holders, diluting existing stockholders by about 76 percent.

Even if Citigroup proceeds this week, the offer still might not be completed until late July or mid-August, Sanford C. Bernstein & Co. analyst John McDonald wrote in a note last week. Once the exchange offer is formally extended, the bank will keep it open at least 20 business days before closing, according to last week’s filing.

“We plan to launch this as quickly as we can,” Citigroup Chief Financial Officer Edward “Ned” Kelly said on a May 7 conference call with analysts.

 

I covered C last week sickned by the borrow rates and the fact that this POS transaction wouldn't frigging close. Look for C to break the buck within a few weeks and the transaction miraculously to close 'well ahead of expectations'

 

I didnt watch the market today but bloomberg reports it was Krugman's comment about the recession that created the late rally. You can't get a better example than this of how much the market is being selective on what they 'price in', if Krugman's forecast(which has been pubicly avaliable for months) happens financials are dead, he thinks the stress test is not stressful enough yet the market somehow found to way to spin his opinion into more stock buying.

This looks like a small version of the tech bubble market reaction when a company announced they were opening an online store or just becoming more internet oriented, the stock would fly

I'm amazed how long this thing is lasting, just how long can people keep buying on: people's comment on the recession, ISM 'forward expectations' pushing numbers higher than expected, consumer confidence better than expected because equities are rising. This is like a mini stock market bubble that feeds on itself

 

The market could easily climb a wall of worry for a long time based on a weak USD strong equities scenario. Argentina and Zimbabwe did it.

Of course with tight bank credit and and rising mortgage rates the housing recovery may get choaked off quickly.

I can see them pulling back the market a bit between now and earnings season(4 weeks away).

But I suspect the potential for a bigger decline will happen during/post earnings if companies show weak guidance into year end.


Obviously June payrolls will be huge for sentiment.


I'm still waiting for "something" to indicate an opportunity to go short OR long this market. I suspect we'll get ALOT of action this summer.

 

Well I started to dig myself out of the hole today, I switched my 09 fed futures and pilled in 2010 ones, they had a nice gain today. If I'm right about them they will alone put me back to even by year end, this will leave my OTM puts and shorts as a freebies, although the possibility of some SEP puts going ITM looks remote(JPM in particular, ACC and MET I still got a shot at it), however since the market already crushed them I will just have to leave them there.
At this point if the market were to rally huge I wont lose much after covering C and GS and having my puts crushed. I will lose in some shorts but it wont kill me

I would have a problem if I'm wrong on the fed, then I will probably post my worst year ever, but I dont think I am

 

Sometimes I wonder if I should short the GBP or buy the 10y US note or short the hungary fronit or do other exotic trades, in the end I dont think it matters. Correlations are so high it seems that everything moves based on one thing, the US stock market and the economy. The high correlations seems to be the market speaking that they are looking for guidance and the world leader as proxied by its stock market provides that guidance. The reemergence of decoupling seems to have started, I want to see how EM stocks react when the S&P500 takes a dive or when Latvia devalues, etc. A pullback on risk taking and their higher betas could mean real big trouble for those stocks

 

Here's some other elephants in the room that the stock market is ignoring. World trade seems to have stopped free falling
http://blogs.cfr.org/geographics/files/2009/06/200969tradecollapsecycleupdate.jpg

But is still in decline and does anyone serioulsy think free trade agreements will return?Less global trade(a decline or little/no growth) is probably a secular trend, there is just no reason to expect politicians to pull back from protectionism

And this guy who is on the NBER Business Cycle Dating Committee, is saying that hours worked is signaling weakness in the labor market, and the headline number is mesleading
http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/

I was going to write about the U6 and official unemployment rate spread(which is widening a lot) but rosenberg already done some work on that on monday. There is an additional financial stress of becoming a U6 'unemployment' this leads to debt defaults and lower spending, yet the stress tests only looks at headline unemployment. A 10.3% avg for 2010 on the headline might be much more stressful for bank assets because that spread is widening and the bank model's are not likely to be capturing that

 

"Most Districts said that credit conditions remained stringent or tightened further. " - Beige Book

Yeah, looks like David Rosenberg was wrong on the Senior Loan Officer Survey showing that banks were loosening credit standards, they are still tigthening, just less banks are doing that. Still it is a net tightening for the economy that is going on.

Just goes to show how its hard to analyze the data correctly and how its important to be flexible and check the facts. He didn't know that US banks were tightening credit during a huge credit crisis because he didnt know how to read the fed survey and thats an economist who has been looking over economic data for decades and paid to do so