I like to look at the world and try to figure out what can cause major shifts in the market to happen. When the markets were plummeting in late February I spent alot of time thinking about what could cause the next big rally and identified two things, stabilization of Europe (specifically Eastern Europe currencies) and a suspension of MTM accounting. I mentioned both of those on this blog and both occurred, though admittedly not as dramatic as I thought they would. Europe saw stabilization in their currencies and it became obvious that mtm accounting would be adjusted in some form or fashion to help juice the short term returns for banks. There were other things that occurred as well but it helped me at least be aware of a potential turn.
So now my attention has shifted to what possible catalysts could now end the rally. European currencies would still be at the top of my list but the trigger mechanism may very well be international banks. Unlike their U.S. counterparts, they didn't have the government juicing their returns in the first quarter. Also, they have been much more aggressive playing accounting games causing the outperformance in their equities prices most of 2008. Also remember that Eastern Europe went into a tail spin in Q1, causing the environment to potentially be less favorable in their core markets. The European banks have been participating in this rally but without the added juices for Q1 outperformance it is possible their numbers will be much closer to trend line. Now only could this cause a massive drop in equity valuations in these banks but it could also upset Europe which could cause its own ripple affect. Barclays has been very busy raising capital with their $8 billion (I think that was the number) sale of I-Shares and a bloomberg article today discussing HSBC consideration to sell its crowned jewel real estate holdings including its world headquarters at the Canary Wharf in London. Combined asking price for their real estate would amount to $4 billion in additional capital (one needs to realize also this sale could also be a give away depending on the financing HSBC could itself give the buyer, so intrinsic value of the deal would be much lower while the capital raise would appear on the balance sheet and in headlines much higher). Anyway, the point I am trying to make is their is a possibility these international banks who are not part of the inner circle in Washington may stink up the place up with a rotten egg. It will also time out well when a possible turn lower in the markets could be expected, very late April into the first couple of weeks in May (HSBC doesn't report until June). As the old adage says, sell in May and go away. While I don't put much stock in sayings, the way this is setting up could in fact be a prophecy that may be fulfilled this year.