Another Stress Test Delay

Spin Control Desperately Needed

Dear Bottarelli Research Member,

Good morning. As we begin the first trading day of May, Bloomberg is reporting that the Federal Reserve will once again postpone the release of the stress tests results. They say that the reason for the delay is to allow executives to debate the preliminary findings with examiners. But in my opinion, they need the weekend to figure out a way to spin these results in a positive way.

I personally believe that they’ve had the stress results for weeks, and they have yet to come up with a way to paint a rosy picture of the test’s implications. After all, regulators and bank executives have made no secret about how concerned they are about this information, as it could spark a collapse in the stock prices of the weaker companies. This could lead to major selling pressure across the financial sector.

After all, the 19 banks in the test hold two-thirds of the assets and more than half of the loans in the U.S. banking system. And despite what Timothy Geithner will tell you, we already know that at least six of the 19 banks need more capital. Where will this capital come from? The word on the street is that it’ll come from converting preferred shares to common equity, which would certainly dilute the price of current financial shares. Add it all up, and I continue to like the idea of holding our FAZ June 8 Calls (FAY FH).

As you can see from the FAZ chart, Wall Street seems to be pricing the financials as if the banking and credit problems have all been solved. Any indication that the financial sector is not out of the woods, and the FAZ could pop higher. Therefore, maintain your calls for a pending upside push.

The same goes for our SRS May 32 Calls (SAK EZ).I openly admit that I’ve sunk a lot into this position, but I wholeheartedly believe that troubles in commercial real estate will spark the next round of selling pressure in the real estate sector. I want to be positioned for when this next wave of selling occurs, because similar to the FAZ play, the losses could come quickly and swiftly. By holding SRS calls, we’re positioned to lock in powerful gains as the selling pressure intensifies. Until that happens, we’ll do our best to wait patiently on the sidelines.

We’re also holding the IBM June 105 Calls (IBM FA) as a “hedge” against a further upside move and the ABX June 30 Calls (ABX FF) for a coming move back above $1,000 on gold. We’re also holding the SMH May 22 Puts (SMH QJ) in anticipation of weakness in the semiconductor sector. This morning, it was reported that global Q1 semiconductor sales fell 30% due to the economic slowdown. This could be the catalyst that pushes the SMH lower, especially if it encounters resistance at the 200-day moving average. Hold these puts as well.

And when it comes to the second half of our DNDN May Strangle, it’s clear that the floor traders sucked all of the premiums out of our calls when DNDN’s rally capped off around $27.00 per share. If you recall, we entered our strangle thinking that DNDN would trade above $30.00 or below $10.00. As it turns out, DNDN hit a high of $27.00 before falling back to current levels around $22.33. Therefore, we’re left holding the calls and the puts for nominal value. At this point, let’s hold the position and see if DNDN can mount another move above $30.00. If so, our calls will be back in the money. And if not, we’ll close out the remainder of our position at the best prices that we can.

I’ll continue to update you on any new trading actions throughout the day. Until then…

Lock and load!

Sincerely,