Re-Capitalize the Euro-Banks!

The stock market looks poised to extend its rally as German and French leaders say they will do whatever it takes to support the Euro-banking system. And it sounds as if there will be a better plan in place than the one German Chancellor Merkel suggested last week, that banks should sell stock to raise money.

That’s just a horrible idea. Because if investors know that Euro-banks are struggling, and then one of the banks offers shares for sale, you can bet that will raise suspicions that that bank is in trouble. Then those shares will trade lower, perhaps significantly lower.

Clearly, the Treasury’s plan — that required all large banks to accept loans — is a much better way to implement recapitalization because it gets the job down and doesn’t single out a particular bank.

Also, don’t miss the implication of the agreement to recapitalize euro-banks. It means Greek default — or debt forgiveness — is coming. A(nother) plan is reportedly coming this month.

Clearly, investors are anticipating a resolution to the Greek debt problem. Stocks can’t rally without hope. But is this the time to start buying stocks?

A week ago, I told you that you could buy stocks in anticipation of a rally. That’s because stocks were pricing in a global recession, when recession was not likely. The rebound has been as powerful as the move out of the hole in March 2009.

TradeMaster’s Jason Cimpl was also all over last week’s rally. In fact, he went all-in on Tuesday morning. Jason’s TradeMaster subscribers booked a 13% and 9% winner from last week already. But Jason still holds a large book of long positions from Tuesday morning, each with double digit return.

Click here to read more about Jason, and his trading service, TradeMaster Daily Stock Alerts.

At the same time, I’ve remained adamant that the fall-out from actual Greek default will be the real buying opportunity.

Now, I’ll feel pretty silly if stocks can simply rally from here, and there s no bearish consequence to Greek default.

But quite frankly, I just don’t see how that can happen. Once Greece actually stops payment on 50% of its debt (or whatever the final number is), we rally don’t know what will happen. I expect we’ll see the credit markets go into stand-off mode, where all the banks are staring at one another, waiting for one to blink.

It should be a tense moment, and investors should be wary of "unintended consequences."

In the meantime, as we bide our time for the Greek default, it’s worth noting that the recent round of economic data we got has prompted economists at Goldman Sachs (NYSE:GS) to raise their GDP growth estimates for the third quarter.

Yes, I know, Goldman was just lowering its estimates, along most other banks.

But the point is that economists now believe the U.S. economy is not flirting with recession. We can wonder why economists have been so inconsistent with their economic projections.

But it should also be clear that economists are not unlike individual investors — that is, they are not impartial observers. Rather, theirviews can be swayed by their emotional response to the economy and stock market. In this case, we could suggest that economists were influenced by fear.

Earnings season kicks off tomorrow, with Alcoa (NYSE:AA). Overall, analysts estimates call for 14% gains in profits for the S&P 500. While the Bloomberg headline says that the "Corporate Profit Rebound Loses Stream", this is a bit misleading.

Sure profit growth was 20% in the first and second quarter. 14% would be less. But it also represents record earnings per share for the S&P 500. And we should also note that the year over year comparisons get more difficult as the baseline rises.

It will be particularly interesting to hear from the banks. Profit estimates for them have been slashed, and so have the stock prices. One wonders if there’s any upside for them at all. My take: I suspect there is for Citi (NYSE:C) and JP Morgan (NYSE:JPM). Maybe not so much for Bank of America (NYSE:BAC). And I am quite puzzled by Goldman Sachs (NYSE:GS). I suspect that stock is dead money until there are management changes.

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