Financials Overbought? What’s Not?!

bank problemsI hope everyone had a good weekend and that those mothers out there all had a good Mother’s Day. This coming week definitely acts as a very critical week for trading and could be a huge influence of where we will see the markets go for the next month or two. There continues to be a big debate in regards to attempting to define this current rally we’re in. Is it a Bull Market now or just a Bear Market Rally? You all know where I stand on the subject (if you don’t just read the posts on this page) and I don’t plan on wavering from that belief anytime soon. I believe we are seeing and will see more indicators this week that will confirm my belief.

One huge red flag that instantly stands out to me, regarding market trading, is the mass move by many companies to issue stock for capital. Like I’ve said before, unlimited government spending is unsustainable and to continue with it would be irresponsible and result in monumental destructive economic consequences. If you take away the government as a source of capital, who’s left in this market? Banks are definitely not lending to the degree that would be beneficial to many businesses. Most private equity groups have their hands tied with their own problems with real estate and negative leveraged assets. So who? The answer is wall street.

Yes Wall Street. Instead of forcing ALL taxpayers to have to "invest" in dying companies through Federal bailouts, just let those wanting to gamble decide to do it themselves by issuing more share offerings.. The fact is, many of these companies needed capital long ago, however, due to the hammering we saw of the market during the first quarter, it prevented a lot of companies from selling shares for equity. I mean can you imagined if Bank of America would have tried to issue 10 billion worth of shares when they were below $4? Think how much more bang for buck they will be getting now, more than three times. I believe part of the plan and hopes for the government in boosting up this market, was to at least get stock share prices to a point, where if companies were to liquidate some, they could get some value out of it. At the February levels, this wasn’t possible for many companies.

However, now, many companies are finding it to be the right time to issue shares. This concept is a simple law of economics. First of all, most companies try to avoid share offerings, as it dilutes stock prices and usually causes some negative reactions from investors. When companies do wish to sell their own stock, they shoot for the highest value point they feel that they can get with the current market conditions. If by chance a big announcement is coming or something else which would cause an increase in value of their stock price, most companies will wait until after that event happens. In most cases, if companies find their stock “oversold”, many will take the initiative to buy back some stock shares, because if they’re oversold, it should be a good investment, right? This is the simple fundamental explanation of company offerings.

Well, today there were several companies who offered additional sales to the market and I believe many will follow. Us Bancorp, Capital One, BB&T, Microsoft, and Simon Property Group were just to name a few of some of the companies announcing offerings of billions worth of shares to the public. Sure, you can make the argument that companies are having to go to shareholders as a lender of last resort, considering there is nowhere left. That may be the case, but such action does not shed positive light on the market and makes me believe that many of these companies feel that their current stock price levels are the best they’re probably going to get for a while.

Other news that could have a negative effect on trading is the probability of GM’s bankruptcy. GM has already announced their plans to close thousands of their dealerships around the world and have also said that bankruptcy is looking to be a likely scenario. Unfortunately, this decision is once again after taxpayers had given tens of billions of dollars for nothing, in which now will probably never been seen again. This is why I showed a lot of frustration in the government’s decision to give such easy handouts. Oh well, hopefully the government will learn from some of these mistakes. As a result, I plan for some new sting in upcoming jobless numbers as a GM bankruptcy will be a big blow.

PPI and CPI are coming out this week, which is very significant when discussing deflationary indicators. Last month’s data showed us very close to some dangerous deflationary numbers and I suspect that this month’s number won’t deviate far from that. As I have stated many times before, I believe it will be deflation that kicks this crash into third gear. Such deflationary numbers are very close as we have been seeing year over year CPI and PPI numbers getting killed. So keep your eye out for them later in the week.

As I discussed as a strong possibility on the podcast over the weekend, today we saw a rather large pullback in PRU’s stock price. I was able to pull the trigger on both some PRU put options for October on Friday as well as picking up some FAZ shares, which worked out quite well for me today. Due to travel, I was unable to get a post out Friday, but I did give an update on the podcast (subscribe here). I think Prudential’s problems will only continue to get worse as the next stage of commercial real estate failure becomes evident. So I plan on holding onto the options for a little while, but overall there was a lot of green in my Zecco.com trading account.

Sure, today’s down trading will not be enough to convince bulls that there is still need to worry. Many are already re-structuring their IRA for the next 5 years. I, personally, believe we will begin to see this market take a turn and start to see some more consistent, downward trading. If markets do bounce back a bit tomorrow, it does not mean that the turn is not here, as consistency is always the key. Another day in the red tomorrow, will only confirm my suspicions even more so.

On Friday, I advised much of my family and friends to take their profits for the last two months, especially in financials, as I (and many others, including Meredith Whitney) have some serious doubts about bank's strength here in the short term. Below is a link for a great technical analysis video discussing the current rally, and what technical and fundamental indicators are showing us. If you like it, you can subscribe to them free and get new video updates. Happy Trading.

Market Trend Technical Video

7 comments:

  1. Anonymous Says:

    FF,
    I caught the whole Whitney interview and it looked like she was going to laugh about the rally in financials....Seriously.
    So what are you doing with SRS now ? Are you going to add calls or are you actually buying shares ?
    Thanks.

  2. 5U Says: This comment has been removed by the author.
  3. 5U Says:

    Tomorrow is a crucial day. We have been in a virtuous cycle in which investors would rather see equity dilution as long as companies could raise capital. In fact, until today, stocks tended to trade up (SPG, MS, WFC).

    Today was interesting because USB, COF traded down. Could this be the turn? A mixed picture in Asia certainly helped and its looking like some countries, like Australia, are doing their best imitation of Obama by raising deficits through a "Robin Hood" budget.

    Uncle Ben coming back and deploying that buy treasury lever for quantitative easing (manipulation) also made today quite intriguing.

    Tomorrow is a crucial day. Let's see if the PPT continues to deal the Green Shoots. Smoke em if you got em, right?

    ......That Whitney interview was classic. She called Obama's actions Frost Nixonesque. I wonder when Robert Gibbs comes after her? Or is he too afraid of her wrestling husband?

  4. Anonymous Says:

    Isn't MSFT actually avoiding selling more shares by offering bonds? ...Meaning they are looking to get a low interest loan for "business purposes" such as buying out a large company or better yet buying back stock. I could be wrong, just wanted some clarification.
    ... Good blog.

  5. Finance Fanatic Says:

    Anon,
    If we see some good indicators this week with deflation and from the first two days of trading, I will most likely go in and take some more aggressive positions. My Friday's buys are performing great as of today, which I may take some profits by the eod.

    Well said 5u...Whitney hammered banks.

    anon,
    yes microsoft is offering notes rather than stock, which has different consequences than actual share offerings...several more joined the share offering party today.

  6. Anonymous Says:

    Really like your blog.

  7. 5U Says:

    heck it out...Merrill is serving the blog cease and desist orders versus Zero Hedge.

    I say where there is smoke there is fire.

    TUESDAY, MAY 12, 2009
    The Full Faith Of The DMCA
    Posted by Tyler Durden at 3:31 PM
    Now that Merrill Lynch has upgraded every single REIT and has a price target of +/- infinity, (conveniently pocketing over $100 million in the process), the company can focus on more pressing issues at hand. And no, not redecorating Thain's legacy office in the neo-uber-criminal style). Instead, the bank has sent not one, not two, but a whopping six cease and desist order to Zero Hedge. As the recently acquired bank can finally afford to pay lawyers again compliments of Schmidt and Sakwa, it has decided to pursue the source of all evil: all those David Rosenberg posts Zero Hedge has published, that seek to educate and provide some color to otherwise confused and CNBC abused readers and investors.

    If it is any consolation, now that David is literally out of the building, ML can sleep soundly that ZH will only focus on the bank's daily REIT upgrades (no, we have not forgotten about those) as it is alas the only source amusement coming out of doomed mother Merrill.

    So, dear readers, please be aware that the following six posts will be removed at some point tonight as Zero Hedge is unable to underwrite and collect on average $10 million per REIT dilution events and thus afford any lawyers (except potentially for White & Case's Tom Lauria).

    http://zerohedge.blogspot.com/2009/05/parting-thoughts-from-rosenberg-ver-10.html
    http://zerohedge.blogspot.com/2009/05/shooting-shoots.html
    http://zerohedge.blogspot.com/2009/05/look-back-at-week.html
    http://zerohedge.blogspot.com/2009/04/are-fed-and-markets-on-same-page.html
    http://zerohedge.blogspot.com/2009/04/spin-on-6-gdp.html
    http://zerohedge.blogspot.com/2009/04/busy-day-for-reit-analysts.html

    As for the 500 or so websites that fervently and automatically repost and redistribute ZH content, well, those we have no control over. Sphere: Related Content