The T Report: Did anyone not sell the news?

Posted by on Jun 29, 2012 in Uncategorized | No Comments


Basically everyone out there is saying to sell the news. Virtually everything I read points out flaws in the announcement. Why the plan won’t work. Who will vote against it. That it is too vague. That it doesn’t do enough. And largely I agree. The plan is vague. Some parts of it will probably change. It isn’t big enough. It doesn’t do enough, BUT, it is yet another clear sign that Europe is changing its attitude towards the crisis.

The bet was never that this summit would produce some “silver bullet”. As I wrote earlier in the week, it is only bears that thought the bulls needed “Eurobonds”. Eurobonds were not a necessary outcome to spark this rally. Nothing is solved, heck, it’s not even fixed, but every sign is pointing to Europe moving in the right direction. Germany and France in particular are using their borrowing ability to support the weakest countries. Banks are finally getting set to get recapitalized without being a major drag on the countries they reside in.

Based solely on the announcement, would I be constructive on risk? No. This particular announcement doesn’t do that much, but I’m long risk because it does enough. It pushes things forward and is another clear indication that Europe is willing to use their existing tools in a more aggressive way than they have in the past. It paves the way for the ECB to act. Over time, it may even lead to changes in the rules, though that is more far-fetched. In any case I view the outcome as constructive, and am very encouraged by the fact that virtually no one is saying it is good. This continues to remind me of the original LTRO where everyone downplayed it (myself included), yet it was a catalyst for a big move in stocks over time. 2012 may be 2011, but it is looking more and more like November/December 2011 rather than June/July 2011.


I am still amazed by the reaction the NY Times article got yesterday. Rather, I should say the NY Times headline got. Why bother with articles at all. The NY Times can publish a 1 page edition of nothing but headlines. It would save a lot of paper, and seems to be all anyone focuses on. As we wrote yesterday, the article was not particularly scary and the headline was far more inflammatory than any of the details presented. With risk-on mode so far today, investors may actually focus on details and JPM could rebound back nicely.

Though JPM’s handling of this entire mess gets worse by the day. The lack of disclosure is appalling. The fact that regulators have created a system where the market cap of the biggest U.S. bank swings around wildly based on rumors and headlines, day after day, and investors can’t get details is truly depressing. Contrast this to Jefferies last fall. Jefferies quickly provided cusip level reporting on the sovereign debt exposure and provided an update on how much had been reduced. They were clear and quick. Any hope that they set the precedent for banks as a whole has been long since shattered.

For me, JPM remains a trade. I like it, but it’s a trade and not an “investment”. How can you “invest” in something that you really can’t know the details. I still cannot believe how many people mention book value, and tangible book value when talking about money center banks – it must create an illusion of control or something, but it is bogus. It is hard to tell what banks have, and market price is more useful than book, because it is an estimate of the real value of the bank, not some creation of accounting rules.

My bet here is that the market has massively over reacted to the whale trade and as details come out, the stock will continue to climb. It has hit my May 11th target, but I actually think it can trade higher than that on the next bounce as Europe is calming down again, and I think the July 13th call will catch many shorts by surprise and leave too many long biased funds underweight “best in class”.

Keep the Faith

We are likely to see contradictory headlines today. Some politicians, German in particular, will have to say tough things to sound good at home. Understand that. Not everything that is said today and over the weekend is relevant. It is about everyone trying to sound good back home. That may create some choppiness, but unless something dramatic occurs, the signs are clearly pointing to a change of direction for Europe and one that is likely to give the problem a pretty solid kick down the road. Whether it can be fixed remains to be seen and will depend what is done while any breathing room is created.