8/6/08 (Freddie Drops, Morgan Freezes, Knee Jerk?)

Traders,


The First Bite is always good (euphoria), but once you finish.....

Well we got that big KNEE JERK 2-3% move across the board. While INDU, NDX, and SPX broke through resistance – the RUT did not. And as I like to point out that is the broader measure of money flow in or out of the market. It is just above the 720 line, not something I would like to call a break-out – unless we confirm today and remain above it – for now it’s resistance. That will additionally be key to see if the other indices hold above these (previous) resistance levels.

The shocker was – there was no shocker. The futures moved up fast and hard – but it is interesting to note on lighter than normal volume. Additionally – there was some short-covering going into the close. So how much of that was actual buying vs. covering – well it will be hard to tell. As for Bernanke – he IS taking some heat, but what could he really do? Cut the rates (which would help the banks and other borrowing institutions) and that would send the dollar lower and inflation higher, Raise rates (which would relieve the inflation and strengthen the dollar) and that would pour gas on the credit crisis fire as institutions strapped for cash would have to pay more. So – do nothing and tell everyone we are “Strong dollar people!” will probably be the status quo. The warning about a recession and that they got their eye on the inflation ball, well just a lot of smoke. However you want to slice it – the market came rushing in and drove higher. It certainly wasn’t on any fundamental shifts in the economy or the financial sector – but you have to hand it to those optimistic euphoric hopefuls. I think it’s a good time to cover those long hard deltas and roll up some hedges, but that’s about it.

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Freddie needs a new pair of shoes!

So Freddie gets the bailout of the century, they get access to the discount window (to borrow money from the FED), Congress eases their restrictions, it really looks like we got a handle on things for the first time and that our now Socialized and Nationalized GSEs have found a bottom and stability with our trusted well informed and brilliant political leaders manning the helm – SURPRISE! I guess not….

Even with the analyst estimates setting the bar VERY low for this troubled company to easily step-over with a 54 cent a share loss, they trip over that and fall flat on their face with a 1.63 a share loss (Yeah – almost another billion). Were we not told that it had already written down their entire sub-prime and low-quality mortgages? Guess not, a few were hiding in those well organized accounting books (wait – were they not the same company that was caught in one of the largest accounting scandals) – go figure that we can’t get a clear picture of what is really going on or for that matter have faith that even our government can man the helm of this Titanic.

That leaves Sec. Treasury Paulson running for help – he has supposedly headed over to Morgan Stanley to ask their CEO for help on what to do with these failing GSEs (Freddie and Fanny). So for now – Freddie on their next brilliant move to shore up losses – is yeah – cut that dividend down to almost nothing. That will save them – NOT.

Regardless – the stock is down over 10% in the pre-market.

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Time Warner (Ex-AOL)

I tried to read through the massive amount of numbers posted for this company – but it is just too big with too many divisions – AOL, Ad revenue, TV, movies, etc. Each division posted their own numbers and charges and it takes a brilliant accountant to make heads or tails out of these numbers – one division does well while the other sees a big charge. I wouldn’t be surprised if they were in the mortgage market too. On the surface it says that profits had dropped 26% and net income fell 22 cents a share. However – is that before or after the tax benefits and/or charges? Forget it – I give up. If you can’t do the math on one page – well I am moving on.

As for now – it looks like Time Warner is on the shrink - going hand-n-hand with the economy. I am sure some analyst will issue buys and others sells – since there is enough meat in the numbers to make a case for both.

The stock is up, I mean down, I mean unchanged in the pre-market – as you can see at this point not even the pre-market traders know what to do.

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AMBAC and MBIA

They are doing a great job treading water – even after losing their AAA credit rating score. They however have not been able to get out of a few CDO insurance contracts and expect further (possible) write-downs that will probably top a billion plus. The good news – they are still booking some net income, which is keeping their doors open. These stocks have lost about 90% of their value over the last year and also a big portion of the market. These two had cornered the market in mono-line insurance and now they are just another small player, as the CDO and SIV market collapses and they continue to have to payout on big losses.

These stocks are between $5 - $10 (each) – and are doing everything and anything to say above water and while the booking of revenue can be pointed to some as a sign that they have bottom, it is still the billions in insured CDOs and other mortgage related products that leave a big fat question mark as to their sustainability.

Investors stay away – traders come and play. Expect some volatility in these low priced issues – that is one thing you CAN bet on.

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Morgan Stanley FREEZES home-equity withdrawals

As Paulson sits in the waiting room to see the CEO to ask for advice on the troubled GSEs, the CEO is on the phone shutting down withdrawals on existing home-equity lines. Yep – you guessed it – Morgan Stanley needs to keep cash too, I think they have also been visiting that Discount Window. Of course the spin is ever so good, ``Morgan Stanley periodically reassesses client property values and risk profiles,'' said Christine Pollak, a Morgan Stanley spokeswoman in Purchase, New York. ``A segment of clients was recently notified of a change in the status of their home- equity line of credit, or HELOC, due to a change in the value of their property and/or their credit profile.'' – OK let me translate that for you – we are not lending out money on home equity lines because we NEED money and we think the housing market is going down further. Of course when asked, she declined to be specific about the dollar amount of frozen credit lines.

As one analyst pointed out, It’s evidence that they don’t think the economy is going to recover quickly. At least they are getting ahead of the problem before the second wave of pressure hits this market – as many think is coming in late 3rd to early 4th quarter.

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Futures Pre-Market

The futures are giving some back after the hyper rally yesterday on Bernanke’s “I sit on my hands and hope for the best” decision. There was some short-covering going into the close and I think the futures traders read clearly into that and are now crushing the spread going into the opening. The legging is all coming from the short futures side for the first hour so far. So expect a little drop at the opening.

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Support / Resistance ?

Well we ripped through some of those resistance levels like butter – and as expected a 3% move was in the cards. The question is where to from here. The news is out – Bernanke is doing nothing. So now what – it wasn’t like a revelation occurred and we found some solid footing in this economy?

INDU 11,500 ??? (We ripped through 11,500 – I seriously though we would close right there watching the action of the day. The question now is that really support? I think we could easily come back down and test it – as soon as today. Do we hold and it confirms support or is it again resistance? I really don’t know, however I would expect a retest of 11,500. The top side 11,750. The key is the close and how much volume are we looking at.)

NDX 1850/1875 (I wouldn’t really say 1850 is really support – but more of a flat area with long gamma looking for a move. 1875 is not really an area to get short either, but again flat delta and long gamma. The index has been between the 1800/1875 area for a month trying to hunt for a trend and reverting when we get up or down. For now expect more of the same – unless euphoria drives us to 1900 – which IS a place to probably get short by September.)

SPX 1250 / 1280-1300 (We are in the upper band of that 4 top resistance area that has yet to see 1300. We are giving up some at the opening – is 1250 a place to revisit? We have bounced off the lose supports 3 times, is 3 times the charm? I sure don’t know – I would say get flat deltas and get some gamma at this point – because 1280 is a straddle area – were history shows a pull-back in the last month.)

RUT 700 / 720 (Yeah we are above 720, but only a point – so I would say we really haven’t broken through – the volume at and above 720 doesn’t show support, but rather resistance. If we don’t close above 720 and head back down – expect the same for the rest of these indices. My feeling is that if the RUT can’t breakout – then any breakout in the narrower based indices is only temporarily. I would keep a closer eye on the RUT than any other index as to money flowing in or out of the market.)

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Conclusion

Wow – yeah wow. As expected we got a 2-3% knee jerk move on really nothing but “hope” that the worst is behind us. The shocker to me was the last 30 minutes of rallying up through the resistances – but after figuring out it was some at the close covering, I am now not putting too much stock into it.
The worst is clearly not behind us as both the Freddie story – looking worst than even the worst estimate from analyst and Morgan Stanley battening down the hatches and keeping as much reserves on the books as they can – means that while we might be in a short reprieve (eye of the storm) it is building steam going into the 3rd and 4th quarter. Some are expecting the jobless to mount above 6% by the 4th quarter and CPI to climb another 1% (based on government data) – that means we are in for a good ride.

For now – any rally – is nothing more than just “Face” – because there is not fundamentals to bet on. We are seeing a strong pull back in commodities – which was probably needed – that is giving some fuel to the boost in equities, but I think you will see the commodities bottom out sooner rather than later and that means another commodity rally and more pressure back on equities.

Use these knee jerk euphoric rallies to hedge and roll up equity positions by locking in gains for long hard deltas. Traders – it’s time to get some gamma on those sheets and expect another move – either above these “new” supports or back down through the “old” resistances.