Calling a Bottom… Again

July 1st, 2008 by CA Editors

Stephen Frankola sends: My call of a bottom in March seemed accurate until just the past few sessions as the indexes have tested or broken through their lows from about three months ago. The Dow, helped by losers Citigroup (C) and Bank of America (BAC) did indeed break through its low. The S&P tested it, and it appears to be bouncing off nicely.

S&P 500:

Dow Industrials:

So why is now the (real, or second) bottom? I think that the planets are aligning - er, mutual fund window-dressing is ending, which will eliminate the recent downward pressure. Such financial losers like Lehman (LEH) and CIT were down 10-15% today on little or no news. The dumping (and possibly subsequent shorting) seems to have little fundamental basis.

So as the S&P and Dow try to squeak out a positive day, maybe this will be the bottom. Many buyouts are failing (fingers still crossed for PENN!), Citi’s now a sell, and nearly everyone has a negative point of view.

Other than the end of quarter, another stimulus, maybe an unexpected positive data point, Fed tightening, or a nice shower of oil that gives the US a nice 10mmb reserve, could cement a turn. Otherwise, the superficial causes of this extra pain may end, as investors rich with commodity gains might reinvest the proceeds into financial (if they follow the sheiks’ leads).

Cullen Notes: I discussed the market internals late last week. Since then, most indicators have improved, with the noticeable exception of the S&P’s TRIX, which has not yet rolled over positive.

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6 Responses

1. Stephen Says:
   July 1st, 2008 at 10:14 am

   unexpected manufacturing strength could provide rallying point… I hope.

   I bought into CIT at $6.88 toward the close yesterday, and got very lucky this morning.

2. MSG Says:
   July 1st, 2008 at 1:23 pm

   Dangers of arb plays:

   http://finance.yahoo.com/q?d=t&s=CFC

   Good thing I got out of this one way early. I made a bad call on this one being an easy arb back in March–failed to realize that this would be a stock for stock transaction vs. cash or debt for stock transaction.

3. Stephen Says:
   July 1st, 2008 at 2:39 pm

   I hear you, MSG. I played around with CFC a little bit, and all transactions and commissions considered, I ended up making a little money.

   Clearly, the market is giving this deal no shot at happening at $67, but hopefully FIG and the other investors would rather negotiate something in the 40s or 50s than pay $200mm for nothing. But as I’ve written in other posts and on my blog, I’m comfortable with PENN as a long term investment, so if I end up holding it, its ok.

4. MSG Says:
   July 3rd, 2008 at 1:30 pm

   Hey Stephen, looks like FIG walked–as expected. Surprisingly, the stock did not tank, so the market called it right on this one before the announcement. Pretty interesting…

5. Stephen Says:
   July 3rd, 2008 at 3:54 pm

   MSG

   Yep, with hindsight it was now basically priced to fail around $30.

   Penn gets $200mm cash and a $1+billion dollar loan, in the form of convertible stock that FIG can convert at a price between 45-67 in 2013… so PENN has lots of money to play with now. The terms of failure were very favorable to PENN, so this shouldn’t hurt operations whatsoever going forward.

6. Stephen Says:
   July 3rd, 2008 at 3:58 pm

   *interest-free loan

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