7/30/08 (No Shorts, Moody's FFF, Bailout, ADP shocker)

Traders,


The head snapping movement in this market is a little crazy - down a couple of hundred, up a couple of hundred. Some serious volatility is the only thing that we know for certainty. It seems that the talking heads latched onto the Merrill Lynch raising money through their $8.5 billion sale of shares and their selling some of their illiquid debt paper for 20 cents on the dollar, finally means - yeah you heard it here - "The worst is behind us, finally!" - please note the slogan has changed and the word "finally" has been added. Maybe that means this was the bottom. Of course the euphoric optimism bought that story hook-line-and-sinker again and Merrill along with the rest of the bank stocks lead the charge and the market rallied strongly. CEO Thain needs to make sure to send a Thank You card to the SEC for that short-covering rally created by the ban on shorts.

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SEC extends protectionism


As I just mentioned the SEC extended their short ban issue on the selective protective 19 financial firms until Aug. 12th. At which time, just like last time, they promise to repeal it. These stocks got a jolt yesterday from the news - along with the belief that the "worst is behind us!" talk coming out of Merrill Lynch. Don't buy these stocks (as long-term investors) - we really don't know what their value is. They have all announced more write downs, they are selling their own shares, getting propped up by the SEC, and are at the Discount Window nightly to borrow money.



Until these companies are free to stand or fall on their own balance sheets - we will NOT know their true value. When companies are selling their own stock to the public (to the tune of billions) to raise money because they can't get loans for decent rates (or at all) in the private or public market - things are not rosy. True - the worst COULD be behind them - but since we can't determine value and have heard that story over-over-over-over again since last November. Well fool me once.... Traders come and play, investors stay away.

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Moody’s FFF their new rating!

Well this company has sort of turned into a joke to a certain extent. Their AAA credit ratings (remember this rating is suppose to indicate that they are as SAFE as US Treasuries with NO risk of default), on the bond insurance companies (which have all but failed), CDO/SIV/ and other structured notes (most of which now are rated junk), and the many of the financial institutions and mortgage companies (many which are now borrowing money or selling their own stocks) – well in hind sight that AAA rating was pretty worthless.

What is even MORE interesting (and rather ironic) is there new model for rating risk has indicated that many of the products they rate AAA should be rated several levels lower. However, that is a new model they are testing and therefore it is not used to issue ratings.

So – of course demand for ratings on CDOs and other paper products of NOW questionable value has fallen sharply. Their 2nd quarter profit fell 48% or 54 cents per share. Investment firms are trying to dump this paper and are not looking to rate more paper as every firm is in liquidation mode. Additionally, many have said the ratings are worthless if the paper is defaulting. To show how bad (or worthless) these AAA ratings are – remember Merrill just said it is selling their CDO paper for 22 cents on the dollar, for your information that paper WAS rated AAA.

Even the CEO of Moody’s is “cautious” about a chance of a rebound in the credit markets this year. He has already cut expenses by 10% and has announced more lay-offs. And while the estimates had exceeded analyst expectations and the stock has not suffered as bad at those it has rated AAA – many are suspect that it will see a quick turn around and the bottom in the company’s share price is still an uncertain.

Goldman has rated them a neutral and says this is the worst quarter in terms of earnings performances. They don’t expect any rebounds soon.

Moody has a big marketing campaign ahead – and that is earning back the TRUST that their AAA credit ratings mean more than just being the first letters in the alphabet.

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It’s official the first of the bailouts has been signed!

Bush was up early this morning signing into law the biggest home rescue plan. This new legislation will help more that 400,000 home owners technically refinance and dump that low yielding paper onto our beloved nationalized mortgage companies Freddie and Fannie. The tax payer are now providing a 30 year (very low yielding and high risk of default) to 400,000 home owners who would otherwise face foreclosure. At the same time it adds another back-stop to those lenders that took the risk and now offers them security of defaulting. Of course it has been spun to restore confidence in Freddie and Fannie – but the reality the Treasury needs to inject even MORE capital to take on MORE debt.

Paulson, along with the Congress – were the chief lobbyist to persuade Bush from his threat to Veto the bill that included grants of $3.9 billion to states to buy foreclosed properties, an addition by the Democrats that was opposed to by the Republicans who have stated this is bill is a bailout of lenders. While many Republicans voted for the bill, adding MORE provisions for spending more money (billions more) to the already very gracious bill – put the administration on the defensive as to not sign the bill.

No doubt there is a struggle going on as to whether we should or should not bailout the housing mess. However the problem is bigger than anyone has imagined and now all sides have realized that a bailout is probably the only alternative as to a collapse of lending system. The problem is that once you get politicians to agree – then the extras start piling on (yeah – more pork barrel spending). Those that have opposed it have caved to the majority of both Houses.
Regardless of who is President – at the end of the day and when this is through another tax bill is coming and it will be a whooper. If your neighbor is one of these so called real-estate 80/20 interest only investors that is getting a bailout – go pop him in the mouth and then send your tax bill to the CEO’s who lent money to these high risk fools! Both are at fault and now YOU are paying for it.

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ADP shocker!

ADP survey showed 9,000 jobs added in July. Which has sent a huge boost to the futures in the pre-market. While this is not the government numbers on employment (which come out later) it is usually an indication of the trend. However if we look at the last 6 months ADP vs. Labor numbers – the ADP has been overestimating the numbers and revising down. They revised the previous month to a drop of 77,000. The Labor reports private payrolls dropped by 94,000, but ADP estimated gains of 11,000 – that is a huge discrepancy.

The shocker was that they reported a gain, any gain. Expectations were for a decline of 60,000 jobs – between the Airline, Auto, Construction, and Financials who have collectively have cut over 100,000 jobs – not a single economist had estimated a gain. The highest estimate was for a loss of 4,000. So I guess the private sector is doing way better than anyone thought!

Economist and analyst are scratching their heads on this one and for now the investors are chasing future prices in the pre-market because any job gains means there is a light at the end of the tunnel, right?

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MBA’s Mortgage Apps Index drops 14.1%

Mortgage applications has now dropped to the lowest level in 8 years. Lending standards have tighten and mortgage rates are going up. As foreclosure ramp last month and median home prices fall over 2% again last month – I guess you could say it is NOT a seller’s market. Housing prices are expected to continue to fall through 2008 as inventories increase – mainly foreclosures and REOs.

Current 30-year fix rates are 6.46% avg, 15-year fix are 5.98% average, and the one-year adjustable rose to 7.25% - the highest since December 2000. Of course a raise in the target rate could push these figures higher.

Currently 1 in 171 homes in the US are in some state of foreclosure – up 121% from the same time last year.

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Futures Pre-Market

Futures were flat prior to the shocking ADP numbers which have sent them higher. The spreads are pretty wide 30mins prior to the opening. Expect ARB traders to step a sell futures into the opening and leg into the cash at the opening. If the spread remains we could see a good POP in the indices at the open.


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Support / Resistance

It’s like watching a table-tennis match in the Olympics – the market is up, down, up, down. Statistical volatility in the last week of trading is 10-20% higher than what the VIX is trading at – Gamma is working – no doubt!

INDU 11,000 / 11,500 (We came down hard from 11,500 area and almost got to 11,000 only to see the market rocket back up. These are times that traders live for – but investors pull their hair out. Keep an eye on the range – we are in the middle and the opening looks higher – but the wind can shift quickly!)

NDX 1800 / 1850 (We were just here the other day before visiting 1800. This seems to be a resistance range – but if we break-out, which we could – 1900 is in the cards. Watch the close we could see some 1875 resistance.)

SPX >>>>1250<<<< (We are clearly in a straddle range were a visit to the 1300 or 1200 level is fairly equal. I wouldn’t want to call this – so Long Gamma and Flat Deltas is probably the best position)

RUT 700 / 725 (We visited the support at 700 and shot off it like a rock, 725 is in the cards. If we break 725 then 750 – but expect more volatility – if we visit 750 in August – I would also expect a visit back to 700 in September. – expect more volatility) ____________________________________________________

Conclusion

More write downs are expected, Thain shocked everyone yesterday – but he sold it well. Selling their paper at 22 cents on the dollar means one of two things: A – Merrill REALLY needs money bad or B – he really doesn’t think the paper is worth ANYTHING if he is willing to sell it at huge losses. I am thinking it is probably more in the A column since they are also reloading up on capital by selling $8.5 billion worth of stock at the bottom (something a company NEVER wants to do) – expect Paulson, Bernanke, and the SEC to be invited to the Merrill holiday party this year.

Top that with Bush waking up early this morning to sign in the massive bailout bill and also the SEC extending the short-ban to mid August – and this market is rallying on WHAT? A combination of euphoric optimism that the “worst is behind us, finally” and government protectionism. It sure isn’t rallying because the fundamentals are looking good.

I think August has seen its big volatility (I could be wrong) – but I am betting that September is really going to see some knee jerky movement.

So far no one can ascertain value – because it is still to foggy with all this protectionism and bailouts. Let these companies tread water and survive on their own merits. Close that Discount Window, Stop pouring money into Freddie and Fannie, and stop with special rules to protect the few that have screwed up – so we can SEE reality. We are just propping up a market that wants to and needs to go down and find a REAL bottom – not this false muddy bottom of bailouts and protectionism.

Don’t drink the Kool-aid!