Financial Flury - Banks Use Trump Card

wells fargo earningsIt seems as though banks wanted to end the week with a surprise and give bulls an Easter gift before the weekend. Wells Fargo stunned investors with their premature earnings announcement, blowing expectations out of the water. The market expected earnings at about 23 cents per share and Wells came in saying they are expecting 55 cents per share this quarter, almost doubling the market's number. The bank released this news two weeks premature of their expected earnings date, saying they felt that this news was important to the market and should be made available as soon as possible. Investors ate it all up...and then ate some more.

We definitely saw some of the strongest gains in financials we have ever seen as many investors obviously feel that worst is over for banks. WFC +31%, BAC +35%, C +12.5%, FAS +41%, UYG +23%...and FAZ -42%! Yes, for those shorting financials at this time, this is a day you wish time would just stop. Even I made some wrong moves today, underestimating these bulls. Bulls were not about to let this rally go today and had no interest in profit taking towards the end of the day. So are the problems for banks really done? I'll get to that in a bit and I talk about it in more detail in today's premium podcast (subscribe here).

crash market stocks podcastsAs FAZ progressed down towards $13, close to the last hour of trading, I actually bought a small amount of shares hoping to take advantage of what I though was going to be some serious profit taking for FAS holders. I mean, come on! 35% going long in one day, how can you not walk away with that. I was determined not to be holding FAZ at close, so when we hit the last 40 minutes of trading and it was down to $12.30, I got out. The losses were not that much, but combined with my small amount of SRS and FAZ options, today stung a bit. My saving grace were my Apple options, being up 50% today. So even after all the blood shed, the damage was pretty minimal. However, I would prefer not to see anymore 40% financial rallies.

Today's announcement definitely confirms my suspicion of positive earnings coming from banks. Sure, banks just had their clean up batter lead off today, which may come back to bite them, but the surprise definitely did spark some emotional trading. I would expect this to not be the only positive report from financials, as Goldman Sachs should be following suit on Tuesday. In fact, depending on the sentiment on Monday, I may go in long in GS, hoping for the positive report, only to turn around and short it the day after. That's the plan at least, so we'll see how that progresses.

As it seems that Wells has no problems, these reports should be taken with some consideration. Even though WFC claimed "minimal" effects from the recent mark to market change, on paper it makes a very big difference, especially when you are one of the largest holders of home mortgages. Sure, Wells Fargo has been one of the top institutions due to their much stricter underwriting they maintained, but even they still have problems ahead. They still have a huge portfolio of soon to be toxic assets and I would be very cautious to say their out of the woods yet. Sure, we have seen some recovery of the "sub-prime" crisis, which lead us into this crisis in 2007, but we have not begun the second wave of foreclosures that will come, due to the recent massive unemployment numbers.

Today's announcement should be one of the best for the banks in the earnings season, which is good for now, but could come back to hurt the banks. Indeed, as I said yesterday, the market was desperate for something as bulls were running out of time to give this rally a second wind. I have always maintained my belief of this rally heading towards mid 8000 levels. With the help of these earnings boost, we may see a bit more than that.

Although many people think Wells "set the standard" for banks today, that's not the case. Wells Fargo has always been a league of their own. They have maintained much more healthy throughout the crisis and has taken the least amount of TARP funds. Let's be honest, if you had an unlimited credit line from the government, you could probably make any business profitable too. Lets not forget that the government has announced over 3 trillion, just this year, in funds to help with toxic debt. So yes, I still maintain the belief of a downspiral, even in the midst of the massive financial rally today. Just remember, volume remained really low. This is not everyone getting back in the market and, in fact, I give more reasons on the podcast why hedge funds are not buying right now.

So even though on days like today where it's hard to imagine that there still may be problems, I continue to maintain my belief. That is that this is a strong bear market rally, reignited by the help of government intervention, only to retrace back down to find new bottoms. Indeed, it may take some time, especially fighting through earnings season, but the time is soon, and models are still confirming that. I look forward to reading some of the graphs and models this weekend to see what I can expect for the near future. Remember, tax season is here, so if you've procrastinated like I did, H&R Block is quick and easy and has some of the best rates out there...unless you don't plan on filing. I will give a post this weekend as well as for my thoughts on next week. Have a great night and Happy Trading.

Posted in Labels: , |

9 comments:

  1. Boogy Says:

    FF,
    Hard day to say the least being that I am in SRS. WOW, I can't believe how the REITS are getting so much positive attention by the BULL station, CNBC, by continuing to dilute shareholders and mentioning openly today on CNBC, " Only the strong reits will survive and take over the weak." That didn't matter a whole lot that there is serious pain to be felt in the future for commercial real estate. It's either a lot of margin called shorts or investors gobbling up the secondary offerings. I know bear markets hurt longs and shorts, but it looks like in the matter of 1 1/2 months....All the short ETF's are on there way to ZERO ! FAZ @ 10, it's about to switch places with FAS. I have played SRS a lot in the past and present and loaded up today as well. What are your thought's on SRS and how low this bad boy can go ? I made the trade and I have to live with the stomach aches for a bit, I assume, but do you think SRS is headed to the 20's or teens ??? Thanks.

  2. Alison Says:

    Hey FF,

    You should have advised people reading your web site to avoid buying leveraged short ETFs and instead buy long term puts should they decide to go short. Besides that, I am going to ignore your site if you don't stop people in the chat section with nude avatars. The name I saw was faisal. This site is becoming a non sense with all these.

  3. Jackson Says:

    I am also a bit pessimistic about this rally, however, the volume was pretty high and more than average for DOW, so short term still something is cooking.

  4. 5U Says:

    great post by zero hedge...

    Key to note here is that Goldman's program trading principal to agency+customer facilitation ratio is a staggering 5x, which is multiples higher than both the second most active program trader and the average ratio of the NYSE, both at or below 1x. The implication is that Goldman Sachs, due to its preeminent position not only as one of the world's largest broker/dealers (pardon, Bank Holding Companies), but also as being on the top of the high-frequency trading/liquidity provision "food chain", trades much more often for its own (principal) benefit, likely in tandem with the other top dogs on the list: RenTec, Highbridge (JP Morgan), and GETCO. In this light, the program trading spike over the past week could be perceived as much more sinister. For conspiracy lovers, long searching for any circumstantial evidence to catch the mysterious "plunge protection team" in action, you should look no further than this.

    http://zerohedge.blogspot.com/2009/04/incredibly-shrinking-market-liquidity.html

  5. Finance Fanatic Says:

    Alison,
    I have not been advising anyone (there is no "advising" done on CMS) to buy leveraged etfs at this point. I myself have not been buying many leveraged etfs. It is because of days like Thursday which I have refrained from buying them at this point.

    However, this does not mean they are worthless or not useful, people just need to trade with caution. If you trade them at the right time, they can maximize your profits. For instance, those who were trading FAS on Thursday made over 40% in a day. They are risky, and should be traded in caution, but I have not regretted trading them when I have.

    As for the chat, the person posting the nudity has been banned and I apologize for such behavior. Any others who are offensive and degrading shall be banned as well.

  6. Alison Says:

    Thanks FF

  7. r32faisal Says:

    Alison is lying, she is my wife and used my account to post nudity to get me banned because I lost so much money on FAZ.. plz unban me :(

  8. Finance Fanatic Says:

    Faisal,
    The ban was a warning and was a 7 day ban. If it is true about Alison being your wife, I would advise you to change your password, because anyone posting crude or vulgar pictures or text will be banned.

  9. Gucci iPhone 6 Cases Says:

    Assuming that the Apple Watch has 250,000 unit per buzz, the Apple Watch will sell 750,000 units in the third quarter. For the fourth quarter, this assumption translates into 1.3 million unit sales.