7/21/08 (BofA? Yahoo Soap! Freddie Credit?)

Traders,

We saw some serious strength last week in to expiration – lead by financials. The SEC policy (banning short selling) on the 19 issues (financial – including Fannie and Freddie) – forcing those traders that are eligible to pre-borrow stock (paying a fee and handcuffing them from the traditional locate ability) – did create some serious rebalancing of positions last week – prior to coming into Monday (when the ban starts). So far it is limited to 19 issues and is only planned to last through the 28th of this month.

I spoke with a colleague who made an interesting observation – “This SEC policy only HIGHLIGHTS the companies that are having problems!” – It IS interesting that the same companies on the SEC ban list are the same ones that have access to the Discount Window at the FED. He went on to state, “If it was REALLY about the illegal short selling they are using to justify such a rule change, we would see it wide spread an include GM, Ford, the airline sector and other issues with MASSIVE short interest in them. This is clearly nothing but selective protecting share price – for Freddie and Fannie – and the other investment banks.” - Regardless – today it starts and most traders have rolled managed their positions prior to this morning. Our clearing firm has ALREADY put these symbols on the “Hard to Borrow” list – so you might as well forget trying to borrow them in the first place – unless a locate (outside the firm) can be found.

Good luck….

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B of A – not looking that bad?

The story at B of A is not as bad as analyst would of thought. Their net income declined by ONLY 41%, which beat the 54% average by analyst. (In a traditional economy – a decline of 41% pretty much would mean the stock would be down hard - but in these difficult times a 41% decline is not that bad???) The results included a $3.6 billion charge off – which was up from the previous quarter as credit quality weakens. Additionally – B of A is stating that their $2.5 billion purchase of Countrywide will add to earnings THIS YEAR? My analyst are skeptical with money lending tightening and the increase in foreclosures. Maybe B of A knows something we don’t, but I doubt it.
Even with beating expectations, and the stock seeing some positive gains in the pre-market, Fitch downgraded B of A this month to A+ from AA, citing increased losses from credit-card and home-equity lending. The company may lose $4.5 billion from Countrywide’s $27 billion of option adjustable-rate mortgage expected to reset. And B of A said that Countrywide may add to earnings, maybe that should of added to that sentence that it may include losses as well? Hmmm….time will tell.

While B of A maybe right about the long-term positive results from the acquisition of Countrywide – one thing they are not too pleased about is that they also inherited their current investigations by the slew of Government agencies and regulators - along with the trailing lawsuits that are chained to Countrywide as to questionable lending practices.

Today we may see some upside in B of A, simply because on the surface the earnings beat analyst expectations – but there is a lot of luggage at B of A, from credit-cards, equity lending, and Countrywide. It is going to take some time for the company to absorb all these issues. Time will tell….

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Yahoo – the Soap Opera Continues

The troubled company is facing many issues, competing with Google, Microsoft (Yes or No), and now internally with Carl Icahn gaining control. All these issues during this economic landscape where the first thing that companies are cutting is their Ad Budget – is not making things any easier for this company.

Well, it looks like Yahoo settled one issue and that is a compromise with Carl, agreeing to give him three board seats to settle a fight for control of the company. The board will now expand to 11 members, with Carl and his selection for the other two. What does all this mean – well – the fight between the CEO Yang and Carl about if and how much Yahoo should sell to Microsoft was an exciting battle that would of made General Hospital blush with envy. Maybe this also means the dance with Microsoft can continue – as Icahn (one of the largest shareholders at 5%) was not happy with the CEO’s handling of Microsoft’s advances.

The stock is seeing as little pop in the pre-market – as expectations mean that Microsoft may come back to the dance floor. Now it just a matter of price.

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Freddie Mac to slow purchases of mortgages?

Freddie (and Fannie) have been given incredible amount of latitude – including being able to visit Ben at the Discount Window. You would think with the amount of cash they are being flushed with that they should be able to continue to take down MORE paper, but obviously it’s far bigger than anyone could imagine. Not only are they thinking about reducing the purchases of mortgages, they are also considering selling securities (oh great – sell their own stock to who – yeah retail investors – I hope they make sure to send a Thank-You card to the SEC for the 1 week prop up in stock price), and reducing their dividend – all while filling to issue another $5.5 billion of stock. Damn – things are sure not that great over at our Government mandated mortgage company.

The serious issue is this means a huge reduction in credit availability to mortgage borrowers – the trickle down affect you ask? Well if the Government mandated companies are battening down the hatches and are tightening up money (lending) supply (obviously they have significant problems) – well the few lenders left will charge MORE for mortgages. I would expect mortgage rates to go up – as fewer lines of credit are available. Obviously mortgage rates do not (and have not) correlated to the Fed Target Rate. It amazes me that people still believe they are.

So while we may see a pop in Freddie stock – don’t expect that to be an indication that the worst is behind them. I think we need to see that credit window from Freddie open again – to indicate they have gotten their own books in order – before we see a fundamental shift at these mortgage companies.

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Futures Pre-Market

We are seeing a fairly good rally in the futures in the pre-market, while fair-value seems to be flat to slightly negative. The spread is pretty volatile and 30 mins prior to the opening it looks like 4 points in the NQ and 2 points in the ES. If they remain going into the opening (which I doubt) we could see a good pop in the cash.

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Support / Resistance

We are getting pretty close to the 11500 resistance level in the INDU and the RUT pulled back from the 700 area. I would say we are hitting some short-term resistance. We did get a good rally to allow some to get out of their “long-n-wrong” positions.

INDU 11,000 – 11,500 (we got a good 3 day rally last week (almost 500 points) – we should be happy with that kind of move in 3 days – I know many want more – but don’t look a gift horse in the mouth. This is short-term resistance area – that means it is about the close. If we can close above 11500 with some serious volume – well we could be building a new support area. However –this IS a place to flatten out deltas, get some gamma on, and maybe even lean short some deltas. – gamma to protect those short deltas)

NDX 1800 – 1850/1900 (We made it half way back up the ladder – only to see a serious smack down in GOOG, followed by AAPL. 1825 is a unknown and obviously 1850 is a straddle strike (leaning short). I give it 50/50 to 1800 or 1850. A strong close above 1850 would help give support at the mid-point to 1900 more credibility. Watch the close.)

SPX 1250 / 1300 (We lost a little steam on Friday above the 1250 line – that leaves me with pause as to whether 1250 is really a support area that I want to add long deltas too. For now I am not sure – I don’t feel confident that we can remain above 1250. If you get long at 1250 – I would hedge 1:1 – with gamma.)

RUT 650 / 700 (The RUT was a great indicator of the bottom and further an indicator that while the narrower based indices fell off hard, the RUT clearly showed there was NO PANIC to the exit doors as 650 held. When the narrower (and more volatile) indices rallied the RUT ripped back up to 700 – but again it stalled at resistance and gave up .5%. 700 IS resistance and if we don’t close above it – well it is indicating that maybe a 650 revisit is in the cards.)

I would have been a lot more happy with this rally if we had seen a panic in the market – specially in the RUT – but so far we haven’t. The blood has not run in the streets and the government is doing everything they can to keep the market from going down. I think there is greater that a 50/50 chance this is a dead cat bounce.

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Conclusions

As I just mentioned, we really haven’t seen blood in the streets. The government’s intervention to keep the market from falling or crashing while on the surface could be construed as a blessing, but I would argue that it creates more ambiguity as to how deep these problems are. I think my colleague was correct, the special favors and deals the government is handing out (SEC short sale ban, Discount Window) and with Freddie now closing the door to more paper – is a clear sign that the problem is bigger than initially thought. The worst isn’t really behind us, if we are to consider these changes, announcements, and special deals. That is what gives me the feeling that this maybe just a dead cat bounce.

The oil sell off – (back to $130) also gave a good boost to the market, and has pointed out there is probably about 8% in premium from Speculators – however fundamentally we will probably continue to see OIL prices high – with bigger dollar swings. Gold and Silvers – also started making run back up (even with the slight pull-back going into the late part of the weak.)
I think these are some areas to start unloading any long deltas and start getting short (with GAMMA) – well that is my humble opinion. I think we still need to see a large shakeout, the foreclosures slow down, the last of the write-downs, and credit lines start to open – before we can call any longer-term bottom in this market.

Long traders – stay nimble – we could see a continued rally the beginning of this week – but we are seeing some resistance at these levels.