Banks Rally on Wells Fargo...Don't Believe It

My response is don't believe the hype of the banks! I know in my last post I told you to take advantage of the banks and buy FAS which is a fund that gives you 3x the normal returns of owning a basket full of bank stocks. This has worked out perfectly as FAS was recommended on April 2nd and if we use the price at the close of the stock market, you would have purchased them around 6.42. My recommendation is to sell FAS today and pocket a big gains in only a matter of seven days. I hope you enjoyed the ride up, the stock closed @ 8.74!!!

Play Defense!!! Here are my reasons why you should stay cautious of the banking sector.

First, the entire sectored rallied on just Wells Fargo (WFC) and let me remind you that every bank isn't built the exact same way WFC is!!!!

- One of biggest reasons why WFC is doing well and the other banks may not is WFC does not have an extensive consumer credit loan portfolio!!! Yep WFC doesn't have to worry about the risks associated with battered consumers who can't pay off their plastic.

- Second, just listen to the CFO, Howard Atkins who openly mention the huge profits can directly be attributed to large writedowns on Wachovia's bad loans. Wells Fargo is probably an exception that every other bank may not be able to replicate. A huge write-down do to their acquisition of Wachovia and a first quarter provision isn't in the cards (no pun intended) for most of the other banks.

So how to play the Fake Bank Rally:

- Start with the bad apples like Capital One (COF) They just got the big smack down by Moody's and Fitch Ratings who downgraded the stock due to the expectation of rising credit costs.

- How about American Express (AXP) and the fact that their default rate was leading the industry. WOW, now I would be slower here to pull the trigger because two firms just upgraded their shares...from basically Don't Touch to Think about it...Maybe

- Finally I am not a believer in Citigroup as their are being propped up by the government

You Are What U Read...

Time to play "What the Headlines Tell U"! Again I think reading is definitely fundamental and taking a look at the latest headlines can give you some insight into what's going on in the market and what direction it may be headed. Here are some headlines from today:

Parsons is in as Citigroup's Chairman
GE's earnings results are expected to drop
UK, US having thoughts of nationalizing banks
State Street downgraded
AIG losing key employees
Commercial Real-Estate could begin collapsing
Satyam could be sold
UK Pound hits 23 year low
Cold Weather makes Orange Juice and Nat Gas Prices Rise
Microsoft Earnings to Take a Hit
Dow Gains 280 pts, but at 8200

After going through some of the larger stories of the day. Here is what they mean to me. Citigroup, GE, State Street, and UK & US nationalizing banks all mean that the financial sectors is still heading lower. Note some of these banks received money from the government already through the Troubled Assets Relief Program (TARP). And if there earnings are still dropping then the outlook doesn't appear good.

Microsoft earnings to take a hit cannot be a positive sign for the technology sector. This will affect PC makers, chip makers, and retailers. A mainstay in the home like Microsoft is having softer sales and that can't be a good sign either.

Satyam is exploring options of selling themselves and this further highlights that transparency is needed and greed is bad. This Indian company's CEO managed to distort their earnings for years and billions of dollars were reported incorrectly.

The Dow was up yesterday, however notice the level is at 8200. Let's flashback to my post in November which called for the Dow to fall under 8000...like it did the other day and possibly see some resistance at the 7700 level.

Dow Prediction


Staying the course:

I have purchased the Direxion Financial Bear 3x, (NASDAQ: FAZ) because for a small investment I will be able to mimic the returns of shorting the financial markets...TIMES 3!

With Microsoft sales softening, I think again investors should consider owning the Exchange Traded Funds (ETF):

Proshares Ultrashort Semiconductors (SSG)

Been Busy...

Some would say being right on the money. Well lets look back at over four months ago, when we told you to re-allocate your portfolios because the worst ain't here yet. And what have we seen is that are call is right on. The Dow has continued to plummet to the level I thought we wouldn't hit for awhile. and that is roughly around Dow 8000. This is a compelling moment because months ago I said that I would recommend that we all start inching back into the market, but at this point the news continues to be bad. Just searching articles on the internet you may come across these themes: Banks Need the rest of the TARP Bailout - Citigroup is selling their brokerage unit! - Bank of America is showing signs of cracking Retailers are not looking good. - Even Walmart sales are declining - Circuit City can't find a buyer and is liquidating all their stores!! Unemployment rates continue to rise - GE Capital is set to shed 11000 jobs Downgrades send stocks to their 52week/all-time/all world lows There is no strategy when the headlines read like this. The only thing is to stay the course with the consistent message that we've had before. I repeat I am and have recommended that you are completely out of the stock market and fully allocated to Treasurys and cash assets. This is especially true for your 401K portfolio because it primary purpose is capital preservation...not appreciation. A portion of your portfolio needs to be exposed to the market and I recommend that you have your own trading account where you can DO IT YOURSELF (DIY)...I don't need Bernie Madoff or any other scandalous investors out there losing my money...when I can do that on my own. It this portfolio you should be shorting more that buying things. Find attractive price points (see previous posts on price points) for both buys and shorts:

SHORTS:
- SSG: ETF that shorts the Semiconductor Sector
- KBE: EFT that shorts the Retail Banking Sector
- Also short the retail, and credit sensitive sectors
BUYS: - BBY: Best Buy is primed for increased earnings now that Circuit City is going BANKRUPT
- V: VISA is down towards their Initial Public Offering (IPO) again after being downgraded

I'll be back to update this post later

The Aftermath...

I wanted to develop this post in response to a great comment from a reader, LLROOMTEMPJ:

"here's a stupid question for you. Now that lehman has filed for chapter 11, why would buying lehman now with an understanding that it may go back up in the future be a stupid idea?Is there no return from bankruptcy? Weren't there some airlines that filed chapter 11 that bounced back?i'm really an idiot, but if you could teach me, or direct me to some resources that would help me to make sense of things, it would be much appreciated."

My response: I wanted to say thanks for reading Urbanomics and I will answer you question to the best of my ability. You are correct Lehman has officially filed for Chapter 11 bankruptcy. I believe that buying Lehman now is not a sound decision because to my knowledge this firm as we know it will cease to exist.

Our first indication is that Lehman did not include any of their viable businesses that can still continue operate in its chapter 11 filing. It has businesses that act as brokers - dealers as well as Neuberger Berman (an investment advisory firm) that were specifically left out...because they still have VALUE. These viable businesses will be sold or liquidated to provide for more cash. I imagine other things like the headquarters (real estate) will be liquidated also. I believe that this decision is key because chapter 11 can give Lehman or more importantly Lehman's creditors the ability to reorganize of sell all the assets of the company and we already see the rush to sell those assets mentioned above quickly for their highest value. Unlike retailers, manufacturers, or airlines...Lehman does not have a lot of assets to sell to generate money to pay back all of the money it borrowed from banks (or creditors) so it must sell the businesses that make Lehman money (similar to how an airline might sell its planes) and with each sale of these assets Lehman begins to disappear.

Secondly, reorganization is unlikely because Lehman's biggest asset is it's NAME. People must trust the name to lend it money so that Lehman can make more money. There will be little trust in a company that has failed at managing your money if it came back.

Lastly, buying the shares at this point is not a sound decision because stockholders get no love in the PRIORITY of recovering money during bankruptcy. Anyone holding the stock will receive nothing and only creditors (usually banks who let Lehman borrow money) get PRIORITY. Once the stock is delisted, or removed from the stock market, it can still be traded but terms of the reorganization would terminate your shares...and leave you with NOTHING.

Hope this helps.

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Today's Aftermath:

The only other thing I wanted to point out is that my long shot recommendation on Lehman was purely a high risk - high reward play. There were only two options BANKRUPTCY OR BUYOUT! And after reading my own post the other night I should have listened to myself and known that if the Fed has already promised not to assist in the process that it was a longshot.

AIG is now in focus and I will take the course of action that I should have taken with Lehman. AIG should be shorted as you see in my STOCKTRACKER PORTFOLIO because they also need cash and the Fed is in no position to lend it out. AIG is considered to big to fail but if I am JP Morgan and Citigroup why should we post $75Billion dollars by ourselves to pay for their mistakes. Even more importantly, AIG's ratings were downgraded tonight and that raises more implications where AIG has to come up with cash really quickly to pay contractual obligations that arise from ratings decreases.

The Hype

The hype comes in all shapes and forms. For most of us avid Wall Street fans we may read or hear about it through our favorite shows, blogs, or newspapers. And the hype reminds you of the teams like the New England Patriots. A great team that was poised to win it all. Many people overlook the fact that there were a number of games that New England could have and should have lost during the regular season and post season before the let down loss in the Superbowl. A number a games would have told you not to believe the hype like the Indianapolis Colts or New York Giants regular season games that exposed the Patriots. Now lets take a similar view to the market right now. Yes, people are excited because the markets are moving up and the Dow even touched 13,000 recently. But how quickly we forget what brought us to this point. The market is still suffering from the stuff that that gave it upset stomach in the first place. The hype is people like Henry Paulson coming out recently and saying that the market turmoil or upset stomach could soon be over. That's like saying that you can give the markets Pepto and this will all be over. Sorry folks, that is not the case and unemployment is now at levels that mirror the last recession in 2001 and many economists believe that it will continue to deteriorate. The financial markets are still a mess...don't believe me, as Citigroup who is throwing up and selling businesses left and right. And I am sorry for the analogies but I want this point to sink in, the markets are don't with us yet.

I won't change my stance at this point and like most of the stocks that are on our radar or that we have recommended here at Urbanomics. Take Ricks Cabaret (NASDAQ: RICK) which is up rough 13% today, H&R Block (NYSE: HRB) which took out new 52 week highs, and Coinstar (NASDAQ: CSTR) which exploded after their earnings announcement as proof that we are picking timely market plays. Ricks Cabaret is a great small cap stock that probably continues to do well even during a recession catering to big wigs who spend big bucks at their "higher-end" (no pun intended) establishments. And H&R Block should probably be coming of a strong tax season as people are eager to file and qualify for the great tax rebate check that our government came up with to stimulate the economy. It will do one thing and that's stimulate bill paying and retail business. Lastly, Coinstar is doing well after a great earnings season and they are benefitting from increased sales in their DVD kiosk business through a big contract with Walmart. I hope you also love the sector specific plays and REALIZE that high commodity prices are here to stay for awhile. Clayton Williams (NASDAQ: CWEI), AK Steel (NYSE: AKS), the exchange traded fund OIH (AMEX:OIH), and others are all great plays and make you feel a little bit better when you buy gas at the pump or buy something made from steel.

Enjoy the weekend and holla back!

Best Performing Stocks

Patience is something that cannot be taught. And as I have evaluated some of the best performing stocks of this year so far, I am pleased to note that one of our recommendations comes in on all the lists with big returns this year. It is Clayton Williams Energy Inc (CWEI). This stock has been with us so long that if patience is your weakness it would have been exposed. If you gave up on this stock that was in a sector we have constantly talked about week after week you would have taken part in these great gains. Need more proof check out these:

Urbanomics post on Clayton Williams, and other energy plays...notice the date of the article and the message from 2 years ago to stick with Energy stocks, Clayton Williams and Weatherford, and Chesapeake Energy.

http://urbanomics.blogspot.com/2006/04/portfolio-alert-ballin-of-wall-street.html
http://urbanomics.blogspot.com/2006/01/stock-update.html

Motley Fool's take on this year's top stocks:
http://www.fool.com/investing/small-cap/2008/04/17/the-years-top-stock.aspx

Seeking Alpha's write-up on top stocks:
http://seekingalpha.com/article/75107-another-month-of-08-in-the-books

I like to note that a few of my friends are making great recommendations at this point and one of their stocks is actually topping the list. This stock is Finish Line (FINL) and what I love about this stock is that we were 100% on the money with our analysis. Now I did not buy into this stock but my recommendation was to wait for the legal proceedings from the Genesco trail to end and look to accumulate this stock in the event that the judge allows Finish Line to walk away from its original deal to acquire Genesco. I didn't like the potential acquisition and it looks like the street agreed with me. Also I would like to point out that another one of my friends has been enjoying an incredicble ride with the credit card network processors Mastercard (MA) and Visa (V). Again, I do not own shares here but I think these are great plays due to the fact that the networks don't have exposure to customers with deteriorating credit concerns like the big credit card issuers do (Bank of America, Capital One, Citigroup)...they just run the transactions back and forth.

Welcome to the Good Life

I go for mine, I got to shine...Now throw you hands up in the sky! This is the third track off of Kanye West's "Graduation" album featuring T. Pain. Now this is the jam, but I am not sure what life Kanye was referring too. It's interesting I find myself not writing as much whenever there is a lot of turmoil in the market. This usually also reflects turmoil in the world, which then reflects itself through the market. Let's see, we have major financial companies, Bank of America, Merrill Lynch, Citigroup, and Wachovia Bank all getting hammered by the weakness in the credit markets and the mainly through the bad investments that were made. Add to that the mortgage crisis in the US which has led to homeowners everywhere defaulting on their homes. All the companies in these areas, which were once living the "Good Life" are singing the blues and laying people off. Then there is that pesky thing called energy...it currently sits at levels that are unthinkable. Oil is reaching levels of roughly 90 dollars a barrel and predicted to continue to rise. Now maybe I am too young to really know what I'm talking about but there has been the "R" word thrown out by some analysts and that would be RECESSION and from what I am seeing in the markets I don't think that some of the whispers are too far off.

I am no mathematician but poor financial markets + bad consumer debt + rising foreclosures + declining property values + layoffs = something is wrong (possibly RECESSION). I am not comfortable with the volatility in the market because as companies are beating earnings or being upgraded they go up and then immediately the market brings them right back down due to all the negative news. Now Warren Buffet wouldn't care because he's in it for the long haul (and he's rich), so for the rest of us that were out there speculating its time to take gains were it makes sense and build on our recession proof stocks...like dividend stocks. I like buying stocks that make products that we continue to buy even when times get tough and I still like technology. You'll appreciate the following updates:

Advent Software (ADVS) - reported positive earnings today; (technology)
Radisys (RSYS) - upgraded by Cantor Fitzgerald, price target raised from 11 to 18 (technology)
Emcore - coverage initated with BUY by Roth Capital (technology)
Burlington Northern (BNI) - reported positive earning (transportation)

They have a few things in common being technology plays and one defensive plays. I think this will be the direction to go for awhile.