Select financials moved midday: Citi up 7 percent, Fannie Mae up 13 percent, Freddie Mac up 16 percent, AIG up 16 percent.
The one thing they all have in common: big government ownership of their shares. I have heard vague rumors that the government may attempt to restrict short selling in names that they own.
This makes little sense, since the government has already had a poor experience with restricting short sales in financials.
Also, note that Citi will likely be floating a large preferred offering, likely tonight, which would account for the heavy volume, as arbitragers become involved. Talk is it will yield 8.875 percent, size uncertain.
At an informal meeting of about 15 hedge fund traders that I attended last night, the tone was notably more positive than a couple months before. Several traders noted that companies they cover or trade had been giving more positive signals recently:
1) earnings were improving across the board, but many traders worried that companies will be adding to expenses — in the form of higher salaries, higher costs — which will reduce the impact of the bottom line.
2) Several noted that retail sales and loan growth would be key indicators. Strong February retail sales was a topic of discussion; now it has to be followed through with consumer loan growth to indicate demand is truly expanding.
3) The key sector are financials. The second quarter will be about financial guidance. Financials are expected to dramatically improve earnings in 2010 on reduced loan losses and improving loan growth.
Indeed, analysts have raised earnings for the S&P 500 to almost $80 for 2010, much of this is predicated on a big increase in bank earnings.
There are still bears. The main bearish argument is vague but it revolves around some formulation of the double-dip:
1) inflation is in a sweet spot, economic data appears to be bottoming. This is a bull trap.
2) Indications of consumer and business confidence have already slipped. The savings rate has peaked and is going lower. GDP numbers will likely be lower.
3) We have simply swapped problems: substituted sovereign debt for subprime, substituted corporate debt for private equity, and you have similar problems.
But Bearishness Declining
Still it was surprising how much bearishness had declined from the prior quarter. Several argued for long positions in some interesting sectors.
For example, one trader active in retail argued in favor of a long position in Cheesecake Factory and to a lesser extent other casual dining stocks like PF Chang.
1) casual dining companies are emerging from the recession with slower unit growth and are transforming into free cash flow machines.
2) Management reinstated the stock buyback and is committed to returning all of free cash via debt elimination and buyback.
3) Comp store sales should be flattish for the year, EPS should grow by 16 percent. There's a strong chance comp store sales will actually increase because: a) they are in a less crowded space than bar and grill, b) smaller portions and lower menu prices are driving increased traffic, c) consumer is strong as retail same store sales continue to surprise.
This is not such a big secret; the stock has gone from $21 to $25 in less than a month as smart traders went long in the second week of February on word of stronger sales throughout the sector.
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