I was talking with a colleague yesterday about some strategies – I was looking at the financials in general and said these things have really over shot (to the upside) in the last couple of days – probably time to get short these pigs. There was a brief pause – oh wait – we can’t short them! Oh well – I guess they will continue to go up (not because they have solved their problems – but because the market is not allowed to function properly).
However, the SEC can only (in an emergency measure) temporarily forbid these ability to short. Just like with the opening of the Discount Window to investment banks and now Fannie and Freddie – (never allowed –except for some emergency measure – and even that is becoming suspect by Congress), the SEC has protected 16 stocks from going down. So what happens when the SEC lifts the ban on Shorting these Stocks? How long will these stocks remain on the Forbidden list? What happens when the Discount Window is closed to Fannie, Freddie, and the $200+ billion lent to investment banks and their questionable paper? Or have we seen – what was initially deemed as temporarily emergency measures become permanent measures – and thus forever change the system – as the government takes more control. We have moved from the government been a sideline observer and regulator – to an actual participant in the market and changing the rules to PROTECT companies – all the determent of the free market.
I recently was in an argument with a smart (but ignorant) investor about the Short Sale rule. He said they should abolish it and thought it was market manipulation this and that. I listened, realizing he really didn’t know what he was talking about - but was rather just repeating what he heard from probably another uninformed person (probably Barney Frank) – I asked him – do you KNOW what short selling is? Can you describe the process and how it affects the market? He had NO IDEA actually what it was – however he had NO PROBLEMS with arguing FOR banishing it. This is a typical problem – people (including our government representatives) don’t REALLY understand the mechanics or fundamentals of something – but they are passing laws and changing the rules as if they do.
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Citi – the WORST is behind us (Again!)
I guess Pandit’s marketing campaign (his investor meeting last week) soften the psychological blow of another $2.5 billion loss. Granted the estimates were worse and the company is getting a pop in the premarket – on the PERCEPTION that “The Worst is behind us!” Have to hand it to Pandit – he can make a $2.5 billion loss and spin it into gold. I wonder how he spun the collapse of his hedge fund to his investors? Hmmm…How big were the write-downs THIS TIME? Only $12 billion – that’s nothing now days. The question remains by those that actually do the math and has YET to be answered – what about that $1 trillion in off-balance sheet positions? That is still a mystery.
Additionally – if you listen carefully – the worst is NOT behind them. ``We will continue to have substantial additional marks on our subprime exposure this quarter,'' stated Citi’s NEW CFO. Great – more MARKS – we really don’t know the bottom yet.
Here is the rub – a majority of the analyst are OVER estimating the Downside so when they DO release big losses they will not be as bad as anyone expects. The reality they just wrote down $12 billion, Pandit warmed up to investors in his meeting last week so they wouldn’t be shocked, and they just loss another $2.5 billion.
Expect a euphoric pop in the stock – helping up the market. But as their OWN CFO has stated – expect MORE write downs!
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Google – WHACK
After the close – the Futures (in late trading) got hammered pretty hard. Google reported below analyst expectations and profit is slowing. The stock fell from $530 to $470 in minutes after the close – dragging down the futures and several other stocks in late trading. On the reopen if fell further (after 4:30 pm).
The first thing that gets red-lined when companies are trying to save money is what? ADVERTISING!!! It is a very expensive item and it is the easiest to cut when a company is trying to save money. Well – Google’s main revenue line is Advertising and that is slowing down as the economy is weakening and companies are looking to batten down the hatches.
Other internet companies that rely on advertising to make the big bucks are also getting hit. Hey if the king of the hill, Google, is not making as much – what do you think the little guys are doing. If a company is starting to cut online advertising budgets – wouldn’t you think the LAST one they would cut is Google? So who were the first?
Expect more negative pressure in this sector – God Forbid you short any of these companies – the SEC is watching you!
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Treasury yields rallying
Well the good news is that we are starting to see a little money flow back into the market as a rotation out of (supposed) safe havens – treasuries are coming back into the market. The money flow – measured by the RUT never saw a panic - never breaking down through the 650 line. Now with the Forbidden List on financials these stocks can only go up (for the most part). Tie in Pandit’s ability to spin sludge into gold – well – we are seeing not only a good move into financials (for whatever crazy reason), but we are also seeing a move out of treasuries into the market.
The yield on the 10-year climbed 7bps to 4.06% - great now you can ALMOST beat the CPI rate of inflation (on the 10 year). The 2-year rallied 9bps to 2.58%.
However – I think we are seeing a very knee jerky market – and while the SEC rule changes has offered a good bottoming in financials – it doesn’t mean that fundamentally things are better.
Keep an eye on the money flow – if this continues we could see a continued rally in equities.
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Futures Pre-Open
We saw a big smack down in the over-night on futures are Google, MSFT, and APPL got a good smack down – lead by the Google news. Then Citi reported a loss of ONLY $2.5 billion (only?) – so we are seeing a knee jerk bounce to the upside again. The NDX is still below fair value – the spreads are still whipsawing and going into expiration – I don’t think we will see the ARB traders take too big of a position going into the opening – the leg risk is just to big with this volatility action.
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Support / Resistance
Well it looks like the supports got some extra help with a new rule change and are resistances really going to be a factor. The accuracy measuring volume, time at price, and short-open interest has now diminish making it more difficult to get a clear picture.
INDU 11000 / 11500 (We are getting up to a resistance area – I would say traditionally a time to flatten deltas (and get short) but we are not allowed to use the “S” word anymore – so is 11500 a resistance or are we on our way to the mother of all euphoric rallies. Don’t drink the purple kool-aid just yet!)
SPX 1250 / 1275 (We got above that 1250 level – maybe able to hold in here. This is a volatile area for sure)
NDX 1800/ 1900 (1850 is a pivot point – this is a very volatile index and with some stocks being heavily over weighted it only takes a AAPL , MSFT, or INTC to drive this index up or down. 1850 is about Gamma and flat deltas nothing more and nothing less. Let you gamma work and don’t take a big delta stance in here.)
RUT 650 /700 (With the treasury yields ramping (thus selling of treasuries) we are seeing more flow come into the market. We haven’t seen a panic in the broad market – YET! A Good sign for now.)
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Conclusion
The market is not being given a free hand to move the way it needs to. The fundamentals of the banks have not changed and even the CITI CFO said expect more write-downs, of course that was over shadowed by Pandit’s cheerleading. The new SEC rule on selective stocks to keep them from going down is also giving a massive boost to the market, but now we have to ask ourselves how REAL is this rally if we can only participate on one side? Of course we are only talking about the financials – but these are not small companies.
I have to ask myself, if the Fed has opened the window to Investment Banks, Fannie and Freddie, the SEC is forbidding shorting these stocks, another $300 billion in loans being posted, the government having access to BUY stock – well why would they do all these things if the WORSE is REALLY behind us? I think they have been able to see a little further behind the curtain.
The spin continues, please note you can only talk GOOD about the market. Any bad talk or negative spin WILL be punished by the full powers of the Fed, Congress, and the SEC. Don’t let them catch you buying puts, selling calls, or god forbid short a stock!
Today is expiration – so watch those deltas. With this kind of volatility expect money to be made after the close as well – with OTM options becoming ITM or ITM becoming OTM. Get those DO and DO NOT exercise notices out. If we have any kind of move after the close like we did yesterday there is a possibility of HUGE money to be made (or lost).
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