Buy the Rumor, Sell the News

by CC June 21, 2012 6:26 pm • Commentary• Education

The worst kept secret of the day is officially out after hours as Moody’s downgraded a host of banks. Here’s a roundup of the downgrades from Business Insider:

For Wall Street, it could’ve been worse. All eyes were on Morgan Stanley because they admitted that a 3-notch downgrade would make their borrowing costs sky rocket and force a hefty collateral call.

Luckily for them, they were only downgraded two notches to Baa1. They’re up 3.3% in after hours trading.

As for the rest of the Street:

  • JP Morgan was cut two notches to AA3, it’s up 1.13%
  • Citi was cut to Baa2, it’s up 0.75%
  • Goldman Sachs was cut to A3, it’s up 0.43%
  • Bank of America was cut to Baa2, outlook negative, it’s up 1.41%
  • Credit Suisse was cut 3 notches, and it’s down -0.11%

Like we said, it could have been worse.

This is a great example of the old axiom, buy the rumor sell the news. As you saw on Quick Hits today we felt this could be the case in the bank stocks so we covered one of our bank shorts, and trimmed some non bank shorts we had doubled down in yesterday in NKE and IBM. From Quick Hits:


CC: CNBC – Citi, J.P. Morgan Chase, and Goldman Sachs will be hit with two notch downgrades. Bank of America is expected to be cut one notch by Moody’s.

Dan: As far as banks concerned like I said earlier, if cuts aren’t as bad as feared, they prob bounce a little. Obviously a lot of bad news in the stocks. And market this last hour clearly affected by the rumors. I am going to be closing the BAC puts before the close. Keeping C as it is July and I like the set up. Not adding to it though.

This was our internal conversation on IM:

CC: r u surprised banks aren’t down more?
Dan: nah
Dan: cause if ratings cut not worse than people expect they prob rally
CC: yes
CC: like MS only down 1.3%, feels like a trap
CC: the ballsy play would be to sell the BAC puts and try to buy the calls for 3c


Well, we closed the BAC puts, didn’t buy the calls (I was half joking.) BAC may not go over 8 tomorrow anyway although, getting those calls for 3 or 4 cents would have been fun with the stock now trading 7.97 after hours. But I wanted to share the type of thinking we do about these sort of news events amongst ourselves.