Looking at the market today, here are two current possibilities for pair trades.
Long Zions Bank(ZION - Get Report)/Short Piper Jaffray(PJC - Get Report)
continues to offer monetary policy that is quite conducive to profits for banks. The guaranteed spread on free money vs. current lending rates allows banks to repair broken balance sheets. I want to be long banks in such an environment.
In particular, I like the regional banking space. The next chapter in the recovery of the banking industry will be for
larger banks to acquire smaller regional banks
. In the aftermath of the financial crisis, banks have dropped the ball with respect to growth.
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That changes in 2011. In order to make up for lost time, the solution to missing growth will be to use profits for acquisitions. Zions Bank, headquartered in Utah and operating mainly on the West Coast, has long been a candidate to be bought.
The stock is undervalued and a perfect candidate for the long side of a pair trade. On the flip side, I have much less confidence in the regional broker dealer industry. There the Federal Reserve cannot help spur underwriting and trading activity needed to boost the profits of an investment bank.
With fewer initial public offerings and less activity on the trading desk, I expect brokerage firms to miss current earnings estimates. Piper Jaffray trades for a relatively modest multiple of book value, but that book value could be in jeopardy if activity does not increase.
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These firms need a healthy economy for their business. Without it, I can safely sell short, pairing the trade with a long on the regional bank side of the business.
Long Verizon(VZ - Get Report)/Short AT&T(T - Get Report)
The world now revolves around Apple. The company can make or break a business. Ask
how it feels about Apple and its decision to not support its Flash video platform? Being on the wrong side of Apple is not a fun position.
As such, trouble may be brewing for cell phone carrier AT&T. The company benefited greatly from its exclusive right to be the company of choice for the highly popular and successful iPhone.
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In the very near future, that exclusivity will be over when Apple introduces an iPhone supported by the Verizon network. The perception is that AT&T's coverage is lacking in some markets. Verizon has the supposed advantage of being the stronger network.