I felt I would make just a few comments to tide you over:
In our last blog (Feb. 6th) we explained that the rally last week appeared to us to be a classic example of the ‘buy the rumor’ type of trade. This week’s trading has completed that phrase as the markets have ‘sold the news’. No surprises here. As the markets move lower during a bear trend you will often see violent moves higher on rumor and then the true trend settles back in as the news is revealed. What must be understood is the following: No one piece of news is capable of changing the trend.
The congressional hearing today illustrated another case of ridiculous political grandstanding. The USA has serious issues that need to be resolved and these jokers are wasting their time grilling the CEOs of the banking industry. I will not waste time on the absurdity of Barney Frank or his cohorts. I will simply say this: If they were wearing togas they would strongly resemble the rabble that surrounded Caesar. Except Caesar, in this example, is the collected citizens of the USA.
One investment theme does surface during this sham of a hearing. Time was wasted complaining about bonuses to management. Cato, Brutus and the rest want to restrict the free market and control payouts of all the banks receiving government funds. While this control has a wonderful populist sound and plays well while pandering, it has one simple effect: The talented people inside these banks – people who are needed to fix this mess – will simply leave. The senators claim to be protecting taxpayers, but this view is completely shortsighted. It is the proverbial cutting off the nose to spite the face. The talent will walk, start their own investment banks when the time is right, and then profit, while the old banks the taxpayer owns will languish and under perform.
So, the investment theme is simply to continue shortselling the banks (including Goldman Sachs & JP Morgan) as the diaspora of talent unfolds. This does not mean these stocks will go straight down. Like all investment themes, a nimble manager will be required to reap the rewards, but reap we will as if it were a full moon.