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Whither Europe, and Withering European Banks

I've got a bullish strategy involving put options to help you profit from strong U.S. bank earnings


Earnings are coming for U.S. banks, with Goldman Sachs (NYSE:GS), U.S. Bancorp (NYSE:USB), Bank of America (NYSE:BAC), BB&T (NYSE:BBT), Huntington Bancshares (NASDAQ:HBAN), Morgan Stanley (NYSE:MS) and many others on the calendar to report this week.

There is a little secret they are not sharing: American banks are picking up market share and assets on the cheap as over-leveraged European banks are dumping assets. I am in Rome, and the country’s recession is deepening rapidly and business activity is slowing.  Gloom among business people is everywhere. They see slowdowns all over Europe, defaults are rising, the combination of weak earnings and the growing number of defaults is putting pressure on banks to dump assets.

Who is buying? U.S. banks. While not exactly covert, U.S. banks are keeping quiet about their ability to pick up quality assets on the cheap. And this will continue for a while, as banks in Europe are terribly over- leveraged. Some German state banks having more leverage than Lehman did when it blew up.

As a trader, what should you do to profit from it?

There are three U.S. banks worth taking a bullish bet and selling puts against: Bank of America (NYSE:BAC), JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS).  Remember, a selling, or short puts, is a bullish strategy because as the value of the stock rises, the value of the puts decreases so you can cover the short puts cheaply.

Their earnings are out or about to come out, and I don’t expect any surprises to the downside, not to mention a floor is being put in under these stocks in addition to the “too big to fail” floor put in by Uncle Sam. Once earnings are out for one of the three names above, consider selling to open an April or May put at or one strike below the current price. I expect the profits from some of the cheap assets they have acquired to boost margins. If you have to pick one name to sell puts against, pick Goldman Sachs.

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