Traders,I got some feedback from people – thinking I called the bottom with some magic or something – as if I knew something. I called a big rally yesterday (from the broker’s wanting to sell the bottom) as a per a conversation I had – not that I knew anything. Take it for what it’s worth. It was rather funny and ironic after sending out the Market Preview to have a 2-3% rally. I should charge money for my predictions…hee hee.
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Market Manipulation – Forbidden Stock – a little rant!
The truth was that we just saw the BIGGEST market manipulation ever that caused the rally. I spoke with a colleague (very well respected, ex-exchange governor, and president of a trading firm) – he stated he has never seen anything like this in his career and for the first time he is VERY concerned about the future of the system. Forbidding the short selling created a MASSIVE short cover rally. It is also increasing the possibility of a very LARGE crash. The rally in the market was NOT from fundamental soundness or that the economic landscape has changed for the better – it was manipulation by the government (via SEC) – to keep the market from going down. We have artificially created a false bottom in this market – that is a VERY scary thing.What is even MORE scary is that where does it stop? Why not keep traders from shorting GM or Ford or many other companies that have sold off? These companies will rally hard – based off a short covering rally! The reality – just because the stock goes up doesn’t mean the business model at GM has been solved.
Imagine if this was instituted last Wednesday and INDYMAC was on the list (IMB). The stock might of rocketed from 50 cents to $10 – however the bank would still of failed on Friday! And instead of seeing the stock fall from 50 cents to zero – it would of come crashing down from $10 to zero! Stock price has nothing to do with the balance sheets of the validity of the business or whether it will go out of business or not. All this has done is pumped a huge bubble into those stocks that should be trading lower or have risk of failure. I can understand the stupidity of some of these politicians.
There is even a BIGGER problem – options market makers CAN NOT make markets now – since they can NOT short these stocks. How is a market maker able to buy a call or sell a put – without being able to hedge. Clearing firms who are both not only flabbergasted that SEC would do something so desperate, deliberate, and manipulative – but they are working to figure out ways that market makers can continue to make markets (their fiduciary responsibility) while not having a way to off-set risk. For those on the pro-side – they have introduced a “Forward Borrowing” procedure – to allow for intra-day shorting to hedge positions based on a future borrowing of stock.
The SEC is ALSO forbidding early long put exercises – (because that converts to short stock). So how do you price in interest to carry positions, if you can’t exercise puts? The Reversal market is going to get out of whack! So far they SEC has said nothing about short ITM calls (another short-delta position) – but I am sure they will stop that as well. Expect radical option pricing and model failures left-and-right. This has turned the entire system UPSIDE – DOWN !!!! Lehman options volatility after the news (and the stock rallying) rocketed to 200% in August – It’s f’n crazy!
I read the SEC Release (enacting the 1934 temp action) – along with other documents. They are on a WITCH hunt for short sellers and expect fines and penalties. These are scary times already – a McCarthy Era witch hunt expedition for short-sellers is CRAZY. These short-sellers didn’t cause Freddie and Fannie to take on $1.5 trillion dollars in JUNK paper that is defaulted – which the Congress encouraged and broke their own rules and allowed. The traders just called a pig and pig and shorted the stock because they knew that Freddie and Fannie had a failed business model.
Let me clarify one thing – I am not some retail guy speculating about conspiracies – I have been in the market as an exchange member for almost two decades. I know, work with, and partnered with well respected exchange members, governors, firms, brokers, and traders. None of them, I mean NONE of them are excited about what has taken place (it was not about making or losing money that made them unhappy) it was about Handcuffing the market and the SEC manipulation that has created more RISK to the market than ever before. We are in a precarious time as it is – having the government intervene has proven a failure (see Freddie and Fannie)– this is just adding a massive amount of HIDDEN volatility! They are NOT letting the only OPEN MARKET system work!
The probability of a crash has increased – the market is NOT able to slowly sell off or find a bottom. Think about this – if Lehman fails – it will now only have FURTHER to drop!
First Congress took a big problem and turned it into an Epic Failure at Freddie and Fannie to the tune of over $1.5 trillion, I guess it is the SEC’s turn to toss a monkey-wrench into the system – changing the rules, going on a witch hunt, and now has handcuffed the OPEN market from being free to find supply and demand. I thought the government does NOT want bubbles – well Congress and the SEC are pumping as much air into this bubble as they can - we are going to see a bubble that will make the Dot.Com party look like a joke. And when she blows – well – I guess we will see the birth of a fully nationalized and socialized nation. Time to get out those Hugo Chavez red berets!
PLEASE let this be temporary – but I have a bad feeling is that FORBIDDEN LIST will become longer. A friend of mine said the list reminded him of the McCarthy list – “Let’s fine those people that shorted those stocks on the FORBIDDEN LIST and take them before a SEC tribunal and PUNISH THEM!” – I already know a few people with shorts on that list and yeah they will be investigated and possibly punished for nothing more than being short that stock. I wonder how market makers with Reversals on (to hedge risk) will be punished?God forbid we have a Free Market anymore.
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JP Morgan – beats estimates
JP Morgan after taking on more risk of Bear Stearns was able (even after more write-downs) beat estimates. Most firms believed that JP Morgan would be sluggish at best – but they seem to be able to work through it. The stock, like the others yesterday, got a great big boost from some short covering as people are NO LONGER allowed to short these companies.
I think we could continue to see some boost in the financial sectors if JP Morgan is indicatives of other financial earnings reports. It is important to note however that estimates have been SEVERLY lowered – so even though they beat, you need to ask yourself what did they ACTUALLY beat? The bar was set VERY low. They still took a write-down. So it is clear that the problem is not gone away – it just shows that it is not as bad (for JP Morgan any way) as some had thought.
One analyst said it will take 6 months before we see the true impact of the Bear Stearns positions filter into the earnings reports. The risk is still high!
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Freddie and Fannie the Pigs are FLYING!
These are incredible times – these two companies collectively have 30% of the entire mortgage market, trillions in paper, they have about $1.5 trillion in crud paper, they have very little money on the balance sheets as compared to their MASSIVE leverage (100:1) (Because Congress has let them take that risk). The FED is now expanded its mandate and has allowed Freddie and Fannie to borrow now DIRECTLY from the FED at the Discount Window. They are looking to post another $300 billion to keep these companies solvent. The plan will allow the government to BUY SHARES of the company! The SEC has forbidden shorting these stocks to keep them from going down. This IS the government MANIPULATING the system, protecting, nationalizing, and socializing not just a company or two but an entire sector of our market.It is mind boggling - I am following this story very closely and if this was to happen in China – we would point our fingers and say look how corrupt their government is! Socialism and Communism BAD!!! But we are doing right now!
These stocks are rising – NOT because they are fundamentally sound – but because of short covering and government protectionism. What is even worst it is happening on the back of the TAX PAYERS, the DOLLAR, and INFLATION.
Look – I am not saying it is strictly the governments fault that got us here – many are responsible. I am not an expert on politics, but isn’t it Fascism when the government nationalizes business, using its powers to control, manipulate, and protect the system. It’s not Democrats or Republicans – this is big government and BOTH sides!
Don’t buy these stocks if you are an investor! If the government takes full control and buys shares – you CAN lose everything. You might want the government to help, but when is it too much help? They have clearly said SHAREHOLDERS will lose FIRST if the government steps in and fully takes over (buying shares).
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Futures Pre-Market
The futures are up – JP Morgan looking fairly good after beating estimates – and we are getting some follow through on the massive reaction to short-covering and government protectionism – via the LIST of FORBIDDEN STOCKS. The futures are front running the cash by a few points – so expect the Arb traders to get short futures to buy the basket – if the spread remains. Which could cause a good pop in the cash at the opening.
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Support / Resistance
The RUT never got below 650 and my bullish call yesterday (luck and nothing more) was just a bottom call when I started hearing over the last couple of days capitulation from brokers and investment advisors. However, we are still at some support areas and now above them. We could see some building at these levels – but the economic landscape has NOT changed.
INDU 11000 / 11500 (We are in the middle of this volatile range – trying to find support. Yesterday’s rally was based on SEC changing the rules of the game and forcing MILLIONS of shares to cover their short position. It did keep the INDU from falling below 11k. – expect some volatility in this range).
SPX 1200 / 1250 (we are back to the previous March low support, I don’t know if it IS resistance and if we can close and stay above it – expect that 1250 will become support again.)
NDX 1800 / 1900 (This beast never got to March lows and the massive rally yesterday as put it squarely in the middle of the range – expect volatility to 1800 or 1900)
RUT 650 / 700 (We got a massive rally and never got to 650. That was KEY to show panic has not set in.)
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Conclusion
I have been in the market long enough to know how things work and protectionism when I see it. Look – I am not against regulation – we NEED regulation, it is when we cross that line from regulating the market to allow it to work and introduce protectionism that the rules have changed. Yesterday’s rally (IMHO) was about one thing – Short Covering and Protectionism. What did you really think would happen if the SEC just said you CAN NOT short stocks in financials? How much short stock do you think is in those 16 stocks? We are talking millions of shares! Those shares are being FORCED to be purchased back. If you FORCE people to BUY stock (millions of shares) what do you really think is going to happen? Of course the market will rally – hard and fast! What is even more alarming is that the SEC didn’t change the rules for ALL stocks – they selectively picked out Banks and Freddie Mac and Fannie Mae. I am not a conspiracist – but think about this – what companies do the government control? The GSEs. Who has the FED been granting favors too at the Discount Window? The financial institutions on that list! – I mean how can you selectively pick a group of companies and say you can’t trade those anymore? How is that fair to companies like GM, Ford, and the airline sector that also has millions and millions of short stock positions in them. They will complain and say what about us?
Just because we have had this rally – doesn’t mean the problems are solved and it is just delaying the ability for the market to find a REAL bottom. You can’t FIND value if your curtail the ability for people to trade in a market by eliminating one side of a trade.
The Congress, Fed, SEC talk about FREE MARKET, want a FREE MARKET, but only so far as it can go UP!
It will now take longer to figure out what the true value of these companies are – since the market is no longer able to ascertain value or price because the SEC has eliminated one-side of the trade.
I now want to buy MORE silver, gold, EUROs, etc. – not less.
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