Get ready for a term youâll be hearing about a lot in these coming days and weeks. The concept is âgood bank versus bad bank.â Basically, the Obama administration is on the verge of choosing a course in which bad assets, i.e. non-performing and illiquid assets will be purchased from banks. The plan would attempt to mitigate the key issue of attempting to price these assets by using a model-pricing mechanism. Either the model would factor the governmentâs staying power to maintain the assets and pay for said securities with inexpensive funding which would boost the inherent values of the banks. Thus, the government may well end up paying above the current market value for these assets. However, if the government were to pay below the value at which the assets are being carried on the bankâs balance sheets, the bank would be forced into issued common equity to the Federal government which of course would dilute the existing shares. The net of all of this is that the government basically annexes the distressed banks, separates the good and the bad assets, and then eventually resells the newly-polished bank to the private sector. The bad assets are stashed in a taxpayer-funded bad bank and eventually sold off, usually at a loss to taxpayers thus the crucial importance of the price utilized by the model-pricing system. The point of all of this is to write everything bad off and then recapitalize- the opposite of what happened in, say, 1990âs Japan. Of course, this mechanism is very difficult to get correct; if overpaying for assets, too much money is pumped out of taxpayersâ hands yet if underpricing, the banks would become nationalized for all intents and purposes. Another problem is separating good from bad assets. Therefore, this is not an easy solution needless to say. For day traders, it creates a great trading situation if nothing else. The initial impulse is that bank stocks will be bid up because this solution could potentially end the crisis by getting money sloshing around again in the credit and debt markets. Whether this will hold as the end-game for this matter would be based on the model-pricing mechanism is not for me to say or even offer my opinion- but whatever opinion you have, you cannot let it affect your day trading. All that you should do as a day trader is react to what you see in front of you. Trading will be very rumor-driven much less news-driven in the financial sector as details flow out so whether you think the plan will succeed or fail (or even be implemented), again, trade your screen- not your intellect or heart. Prices were up about 0.5% in Tokyo and Sydney while European bourses have rallied 2% to 2.5% as of this writing on the anticipated good bank/bad bank rumors. Futures state-side are indicated sharply higher as well. Trading today will be very rumor-driven and busy in the morning and the afternoon. The Fed meets today so while interest rate policy will remain unchanged, who really knows exactly what they can or will say? Barring details of the Fed plan indicating the dilution tenet per the aforementioned discourse in todayâs blog, look for equities to maintain their strength, again with a somewhat placid late morning/early afternoon as traders settle in for the Fed release. Reiterating- Please understand that if the ideas do not get to the hoped for set-ups cited below, more often than not, one should not blindly trade the symbol next to said idea. If the whole story is not there - If something is good, assume either a short thru unchanged or an A-B-A2 based on direction of the market unless specifiedIf something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified- Most stuff today is news-centric as equities did not close near a high nor a low yesterday. Furthermore, it is a very news-worthy day with the bank rumors and earnings moving stocks. Good- The following stocks have good news and/or a strong technical pattern WFC, BAC, C, STI, USB, BK, STT, PNC, JPM- among the banks in particular and financials which will be in play today on the rumors of the good bank/bad bank plan; please please do not scalp them- wait for bigger moves and go with the trend rather than letting your opinion of the plan fog judgment. Also, WFC beat earnings and indicated they will not be accessing TARP. MWE- closed on the high yesterday YHOO- good earnings; CEO said âall options are on the table.â NSC- good earnings SYK- good earnings ALTR- decent numbers VPRT- great earnings JAVA- smashed earnings TUP, RIMM- mentioned on âMad Moneyâ last night BDX- good earnings BHI- great earnings GD- beat earnings T- beat earnings Bad-The following stocks have bad news and/or a weak technical pattern GILD- beat slightly, but no guidance DV- met earnings, but with the run-up recently from the pending legislation in Congress, it will likely sell off on the news ELX- bad earnings PLT- poor earnings GE- Moodyâs to review the company for possible downgrade MMR- broke to a new trend low yesterday; looking to short thru Tues 6.60 low when/if it gets there CHK â announced offering of $500 million of senior notes BA- missed earnings estimates LM- abominable earnings TEL- missed earnings Earnings: WED JAN 28 BEFORE AMG BA BDX BEN BHI CFR COP DOV GD HES LM MKC MWV NYT PX SAP SO SY T TDW TEL USG WFC WLP WTNY WED JAN 28 AFTER AF ALL AMP ARG AVCT BSX BXP CAI CAVM CBT CTXS CVD DNB DRE DST EGN HBI ISIL KEX LRCX LSTR MEOH MTH MUR NTY OI QCOM RHI RYL SBUX SEPR SYMC TSCO TTEK WDC Good luck today. Erik R. Kolodny