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Cliff Dive Ahead For Bank Stocks

By: Rick Ackerman, Rick's Picks

-- Posted Monday, 27 April 2009 | Digg This ArticleDigg It! | Source:

Rick’s Picks

Monday, April 27, 2009

“Phenomenally accurate forecasts”


We’ve masked the salient details, but can you guess which NYSE-listed stock owns the powerful rally shown in the chart below?  There are two things to notice: 1) the company’s shares are trading above $100 – a rare distinction at a time when many erstwhile blue chip companies have been reduced by the Great Recession to penny-stock status; and 2) the stock has nearly doubled in value since early March – a far better performance in these hard times, even, than Apple, whose shares have appreciated by “only” about 50 percent over the same period. Moreover, the stock has risen 278% percent since November. Give up?  Here’s another hint: It is a financial company whose program trading in recent weeks has accounted for more than half of the transactions done by NYSE member firms in their own accounts.  



We are talking about none other than Goldman Sachs Group, which has become such a dominant force in U.S. equity markets lately that one might infer it is the de facto trading arm of the Federal Reserve. Not exactly the kind of stock one would want to bet against, at least not right now. Some readers may recall that Rick’s Picks went on record with a prediction that Goldman shares eventually would trade for less than $30. But that would obviously be well down the road, assuming it happens at all. For the moment, and notwithstanding our extreme long-term bearishness, we regard Goldman as the bellwether for the stock market, since its daily ups and downs perfectly mirror the hubris and folly that have been driving the broad average higher since early March.


So how high can Goldman go?  Our current outlook calls for a rally to at least 144.05, a Hidden Pivot that lies about 18% above Friday’s settlement price of 121.85. In the meantime, we should expect the stock market as a whole to remain more or less immune to bad news and to continue blithely higher, extending the bear rally begun seven weeks ago. If the Industrial Average continues to track Goldman’s ascent at the same pace, then a 500-point rally to around 8600 is coming.


‘Time Value’ Drives Rally


Incidentally, we came across an interesting theory in the blog world concerning why bank shares have appreciated so much even though, without Fed support, the money centers would all be insolvent. “Even with huge shareholder dilution,” wrote a blogger who identified himself as Derivatives Trader, “all financials retain their optionality, which answers your question as to why they rally. An option has both intrinsic and time value. Financials intrinsic value may be zero, but they are still worth significantly more if there's a reasonable chance they get back to profitability and solvency.”


Although we would question whether the odds of the banks returning to profitability are indeed “reasonable,” we agree with Derivative Traders theory that intrinsincally worthless bank stocks are being priced according to their “time value.”  In that regard, Goldman Sachs is probably as good a speculative pass-line bet as any financial biggie right now, since the company is trading, literally, on the full faith and credit of the U.S. Government. However,  if you believe as we do that the Federal Government is itself bankrupt and that a day of reckoning awaits, you’ll want to avoid getting caught up in the hubris. Financial stocks are headed for a cliff-dive, and any investor who can’t see it coming is likely to perish on the rocks.  





Rick's Picks publishes a daily trading newsletter for gold, stock, commodity, and mini-index traders 240 times per year. Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers' initials will be used unless express written permission has been granted to the contrary. All Contents © 2009, Rick Ackerman. All Rights Reserved. 

-- Posted Monday, 27 April 2009 | Digg This Article | Source:


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