Trader Talk

3 Clear Risks to Banks Now

Banks mostly flat, with modest weakness in the larger regional banks. It's a good sign: theBank Index (BKX) rallied almost 25 percent from the February low to the high last Thursday, and declined only 3 percent on Friday.

There are three clear risks: 1) regulatory reform, 2) additional enforcement actions from the SEC, Department of Justice, and/or state Attorneys General, and 3) civil suits from clients.

Airlines down today: April revenues will clearly be a problem due to the Iceland volcano, as even U.S. airlines like United are cancelling flights in Europe.

But airline earnings reports will be good: Delta kicks off airlines reporting season tomorrow, AMR on Wednesday. There have been several positive trends: 1) fares are generally higher, 2) load factors are up, 3) summer travel talk has been strong, and 4) talk of industry consolidation.

HMOs trading up: United Health kicks off earnings for HMOs tomorrow. In general, the first quarter was positive for HMOs: 1) pricing trends are improving, 2) enrollment is mostly stable, 3) the flu season wasn't as bad as feared, and 4) reserves appear to be in good shape.

The issue is the impact of healthcare reform (remember most of the true impact will not hit for several years), as well as increased scrutiny from state regulators. We will hear more about both these issues on the conference calls.

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