iBankCoin
Joined Jan 1, 1970
509 Blog Posts

Good Morning….Now Place Your Bets

The big news item today is, of course, the release of information regarding the bank stress tests one hour after market close. Is it really going to be so bad? Can we trust our government to tell the truth? Is BAC really worthy of being up another 17% today? Is our nation in dire need of Gamblers Anonymous?

Without a doubt, we are in overbought territory, the likes of which we have not seen in almost two years. However, just remember—with clarity and vividness—-that markets can stay at overbought levels for a period of time.

The key today, as it has been this past week, is how the banks are behaving.

WE HAVE REACHED A MAJOR MILESTONE WITH THE BANKS NOW. IT IS CLEAR THAT THE GOING BUSINESS CONCERN/GOING OUT OF BUSINESS ISSUES ARE NOT ON THE TABLE.

Yes, at least 10 of the top 19 banks will have to raise capital, but there is no question that our blessed government will not let them fail.

One key measure that is driving all this bank asshattery is a 4% tangible common equity ratio. Knowing this metric is quite useful from a valuation standpoint, because you can then make assumptions (within the stress test) like default rates, writedowns, loan loss assumptions, etc. and figure out what these banks are really worth. Especially if you use a low 1% ROA and an 8x-10x PE multiple, is it possible there just might be some banks that are really undervalued?

What a thought! Who knew?!

I’ll leave you to do the math.

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Are We There Yet?

You think this market is done? Don’t jump up and stick a fork in it just yet. As John Maynard Keynes has often been quoted, “the market can stay irrational longer than you can stay solvent”. I suspect that applies to both bulls and bears.

That said, my market readings are indicating we are overbought at this point in time:

NYSE Bullish Percent: 74%……The last time we were at this level was June-July 2007.

Nasdaq 100 Bullish Percent: 84%….This level is higher than the 82% recorded in April 2001. The only time it has been higher than now, was in June 2003.

Percentage of OTC stocks trading above their 10 week MA: 84%……This is the highest level since June 2003 (highest level ever recorded). The current level is also higher than at anytime during the tech bubble.

Percentage of NYSE stocks trading above their 10 week MA: 92%….This is the highest level ever recorded, surpassing the 90% level in May and June 2003. During the tech bubble of 1999- 2000, the readings were only in the 80%-85% range.

The percentage of NYSE new highs to the total of new highs + new lows is currently at 74%. This is consistent with the bull market readings of the late 1990’s where levels reached up to over 95%(!). During the height of the tech bubble 1999-2000, this reading was actually only 50% in January 2000. The market peaked two months later in March.

Given these simple metrics, one has to conclude that we are very overbought. However, there might still be room for us to see the ratio of stocks hitting new highs expand even more, which would be consistent with the peak of a near term bubble.

A word to the bearish and prudent minded: If in doubt about the ability for this market to continue to rally, go back and re-read the Keynes quote.

In practice, it is prudent to start taking money off the table here and have some hedges in place—-just in case the market regains its senses.

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Alpha Buy: HTGC

This business development company reports earnings on Thursday. Venture capital financing is not without it’s troubles. However, if you believe we could see a 2nd half recovery to our economy, take a look at this.

It’s investment portfolio of tech and life sciences companies was valued at $581 million at 12/31/08. Ask yourself, “have these gone up or down since the beginning of the year?”.

Now look at it’s market cap of $209 million…..yes, this is an asset play.

The dividend was paid in stock last quarter, but will probably resume in cash this quarter since they paid off their credit facility with Citigroup and Deutsche Bank. Estimating the divi at about 19% annualized.

Bought it at $6.46 this morning. I’ll update more about the company and the BDC sector in The PPT tonight

Happy Cinco de Mayo.

UPDATE: Target price is $12.75

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Regarding Breakouts

As I review the stocks and ETFs that are newly breaking out, I’m not only surprised at the numbers (178), but also by the number of “potential” breakouts (196). These are stocks that are within 5% or less of breaking out to a new recent high.

This might be a good sign that even though this rally seems extended, there are still stocks waiting in the wings to keep it going.

Some notables:

ETFs: China: FXI, TAO…..Financials: UYG, VFH, XLF…..Currencies: FXF, FXM….Banks: IAT, KBE, RKH

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A Public Service Announcement

“We need to raise the standard of living of our poor, unemployed and minorities. For example, we have an estimated 12 million illegal immigrants in our country who need our help along with millons of unemployed minorities……Stock market windfall profits taxes could go a long way to guarantee these people the standard of living they would like to have as Americans.”

—-Nancy Pelosi, Speaker of the House of Representatives

Not only is this woman scary looking, she is a nutcase. But we all knew that. Forgive me for stating the obvious.

By the way, excuse me for interrupting your string of profitable trades, but Madam Speaker Nutjob is wanting to put a windfall profits tax on all stock market profits, including those within 401ks. In other words, what you have saved towards your retirement should be taxed (in addition to income tax), to help our illegals and unemployed hedge trimmers, because they aren’t living the American dream like you or me—-all things being equal, of course.

I’m so upset, I’m refusing to trade (not really). This is bad.

This woman must be stopped. (May I suggest waterboarding?….kidding! I’m only kidding.)

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