Junk in the Trunk (ft. The Kackler)

After a couple of weeks of positive punditry, where commentators far and wide have waxed poetically about how well the EU Stimulus package has stabilized Greece, the back end of the story seems to be holding the truth...


Truth is, Greece found its Credit rating shaved to JUNK yesterday. Oddly enough, the good folks at Moody’s had the courtesy to wait until the afternoon to realize that Greece had more junk in its trunk than J-Lo. There’s more…The EU and IMF threw $1 Trillion worth of stimulus at the Eurozone issues, and the US markets have done nothing but trade down since. Yea, Yea, there was a one day move on the announcement; everyone was popping Champagne as the US equity markets added some 400 points, but those Government Stimulated gains were quickly washed away in a 12% selloff spurred by Euro fears. In an even more unusual turn, BP, who is currently in the middle of a disaster with no foreseeable solution and no reasonable way to estimate its ultimate costs, had its rating lowered yesterday to BBB, still two notches above Junk. I tell ya, you gotta hand it to these rating agencies, first they do a bang up job rating Subprime Mortgage backed securities AAA, now a nation with a Trillion Dollars in backstop cash is junk, and a company who caused the largest environmental disaster in US history is still BBB. Hell, if Greece is junk, then I’d rather own a piece of junk right now, than a share of BP.


Flighty Financials
There is a growing sentiment that, while Greece looks bad, and their downgrade rippled markets slightly, I stick to my statement published on the CNBC blog (here) that there is still a big event out there. The story right now is Oil in the Gulf, and Junk in Greece, but to me the real devil lurks in Spain. Greece is only 3% of the Eurozone’s economy, so the risk of default has headline risk, but not huge, tangibly damaging effects. The Spaniards seem to have a growing problem, and it is gaining momentum. Let’s do a quick comparison: Greece has 10% Unemployment – as compared to Spains 20%. On top of that, workers under 30 years old are facing 40% unemployment in Spain. So, the 4 out of 10 younger workers who can possibly work harder, and deliver more productivity, are on permanent siesta. All the Spanish banks are still facing a growing liquidity crisis, and Spain isn’t some 3% component of EU economic engine; Spain is in the Top 4. This, my friends, spells trouble on many fronts, and most importantly the Spanish disease could be washing ashore in the US. With Foreign banks on the brink, any negative news could spur new fears for US banks. A sovereign default or a bank blow up in Espana could turn the focus to the US banks, which have stayed under the radar as the world has focused on Europe. The re-examination of the stress levels on US banks could lead to a call for a recapitalization. A recapitalization would need more Gov’t stimulus, and our Treasury is kinda tapped right now, and there’s growing interest domestically to no longer engage in public bailouts. The idea of a major US bank failing might not sound probable, but it is plausible, as no politician can possibly vote to bail out a bank. It’s just not good election year politics. The Financials may have seen some upside recently, but if you have a profit, I’d take the money and run. These stocks are in danger, and the way to play the financials, in my view, is from the short side. Financials in play for the Bears are:

C BAC ABK MS

And a broader play to cover them all would be

XLF

XLF is the ETF for the Financial Sector, and as the US banks/financials go, so goes the XLF. I think at 14 bucks XLF is overvalued, and has room to roam to the downside.
Today, I am introducing a new weekly contributor, the Bull who will offer readers the contra perspective to my Bearish Point of View. The Bears aren’t always right and when contemplating any investment, so you should arm yourself with as much information as possible. So, today I introduce you to one of my favorite buy side Sales Traders with his dissenting opinion on my commentary.

Today’s contributor to the Bull Bag, Tom Kackle:

The definition of volatile:
a. Evaporating readily at normal temperatures and pressures.
b. That can be readily vaporized.
c. Tending to vary often or widely, as in price:
Well, I have seen many a traders P and L evaporate these days, and prices? Well, they’ve recently been varying more often and more widely than ever, that is for certain. Stocks go up, and stocks go down, but after all, that is what evaporation is all about, no? The rains come and go, and as we all stand soaked in the blood, sweat, and tears of this past May, I have to believe it is time for some stocks to make their way back up towards the clouds. Dick Bove is calling for a “big pop” in C today and I think that can be said of the entire sector. BUY XLF.

The financial sector is oversold from an intermediate-term perspective. A two-month correction in the XLFs generated a successful test of support near $13.75. I think XLF is oversold compared to SPX, which bodes well for short term outperformance if you buy the banks. Blood, Sweat, and Tears wrote a song called, “Spinning Wheel” in which the lyrics go, “What goes up, must come down.” Well, my wheels are spinning too, and what goes down, must go up once in a while, also.

The Kackler
Sales Trader, Cantor

Hot Shorts
Take Tom's optimism with a spoonful of salt, and if I were you I’d stay towards the short side of this market This TK guy may look stupid, but he’s got a good handle on the markets. I offer you the info you make the calls. While I am willing to let the Bulls into my China shop, when it comes to Hot Shorts I can’t let anyone tell you these are going up. Today’s Hot shorts:

RIG NBG IFLG GOLD HCS

Lastly, there seems to be a growing trend for shorts to be more focused around NYSE names. Last week, roughly 87% of all names requested through the (LocatesStock platform were listed on the NYSE. Maybe this is because the benefits of stimulus reflected more in the stronger companies, more so than the growth companies on the NASDAQ. Maybe they got more of a pop from all the stimulus, and shorts see the larger issuers as the place to find overvalued situations. I’d stay focused on finding the overvalued equities, as there are a lot of them.

Tootin my Vuvuzela
Yesterday the Bears started the week on a hot streak. With a low volume thinly traded market ranging from green to red, and finishing the day generally flat, if you played yesterdays HOT SHORTS from open to close you’d have brought back a 1.5% return for the day. Not bad on a dead day with a flat finish.

Happy Trading.