8/9/08 (Trade Narrows, Buy-Back Good?, Georgia Calm!)

Traders,


We saw an amazing rally at the opening right into the late trading session before we started seeing retreats across the board. The INDU touched and broke through the 11,800 level (remember that is the area we broke down from in late June, which had been the previous support) – however it retreated to close below 11,800. The same is true across the board – NDX 1950, SPX 1300, and RUT 760. The massive move – following the big rallies – to touch these resistance levels is a little on the “hot” side (meaning to fast to quickly), but I guess that is what we can expect in a volatile market. Big fast moves up – is NOT a good thing to build on – because it doesn’t allow volume to build over a period of time. Why is that not good? It means fewer market participants in a wider band of prices. These kinds of moves are indicative of market gaps, short covering, or order flow imbalances. That usually means more, not less volatility – that’s why they traditional call them “blow off tops” regardless if it was created by a gap, short covering, or imbalance.

For now take advantage of it, roll up positions, lock in gains, and move your curvature appropriately – remember trading is NOT putting on a position with a “wait-n-see” attitude. Get proactive!

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Trade Deficit – NARROWS?

Fully unexpected was the trade deficit narrowing by 4% as all analyst and economist expected to widen – mainly from oil imports. If these numbers are accurate it is fairly good news for the economy, maybe the weaker dollar has trumped the higher oil prices for businesses – as those multi-nationals are moving products over-seas at a higher rate.

The economist had expected that the gap would increase – they too expected the dollar to help – however because of oil prices, shipping, and the shift in manufacturing – the weak dollar could not trump the slow-down. Even though we have seen it narrow – it will take some time to review the numbers to see if we are seeing a slow-down in exports, which is expected.

The futures really have not reacted to the news – and remain mix in the early morning session.

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Morgan Stanley to Repurchase $4.5 billion in securities?

Why would Morgan want to repurchased $4.5 billion in auction rate securities for PAR value? It seems nuts – since they are in need of capital and have (with many others) been visiting the Discount Window. Why? Pretty simple, when you are under investigation on those securities you sold, because of questionable handling and New York’s Attorney General Cuomo expects to begin immediate settlement talks to resolve those probes, why not just buy them back and say “No Harm, No Foul?”.

While the spin is in full swing, there is no denying that the announcement by Morgan to buy them back within hours after Cuomo statement about immediate settlements is obviously connected. The spokes person for Cuomo stated, ``This is too little, too late, and our investigation into Morgan Stanley continues!”

Morgan is not the only one, Merrill Lynch as well is trying to get in front of the probes by announcing buy-backs of these securities. Many other firms are in a similar mode – buying back securities that they don’t really want to – to avoid the probes and offer settlements. It’s not just their reputation on the line. As money is already tight – big fines – followed by guaranteed civil action or class action would probably follow close behind the investigations.

Morgan’s repurchase of $4.5 billion is a positive first step, but hardly No Harm, No Foul. Remember that over $300 billion of these auction-rate securities have collapsed – and these investigations may uncover some issues that could lead to regulatory action, fines, or worse. Citigroup will pay a $100 million fine and repurchase about $7.3 billion of debt under a settlement, UBS is paying a $150 million fine, and buying back $18.6 billion in securities.

So don’t let talking heads on TV spin these buy backs as if these banks are doing better and looking to start making investments and free up capital. They are ONLY buying them back because of settlements with the regulatory bodies or to get in front of regulatory action.

Clearly – this is not a good thing for the banks and firms as they struggle to keep cash on the balance sheets, not MORE auction-rate securities. Some of the repurchases at PAR value are for losses as well. Remember, just last week Morgan froze customer equity lines – to shore up capital – they certainly don’t want to buy back these securities.

Several trading firms are already recommending getting out of the financials (AGAIN – for a second time) and possibly going short. This isn’t good news for banks in need of capital.

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Russia calling off offensive in Georgia

For now Russian President Medvedev has halted the offensive into Georgia. While this is good news for the people of Georgia, it is also relieving oil premium risk as the world’s second largest oil pipe line runs through the region. There was accusations by the Georgians that Russia was trying to bomb the pipe line, reported by CNBC yesterday – however these are probably no more than rumored accusations.

While this is not an end to the Georgian problems with Russia – the halt of military action is a first step and should also relieve any pressure on oil as to the pipeline. Keep an eye on this story – as anything could happen.

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Futures Pre-market

The trade deficit narrowing – thought to be good news – has not helped futures as they continue to give up gains from earlier. The futures continue to slip going into the opening. However – I don’t think we will see too much action by Arb traders going into the opening – as they may not want to risk the long future leg and “hope” to get off the short cash position at the opening. Especially after seeing the market give up going into the close yesterday. If the futures remain at these level expect a drop in the cash.

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Support / Resistance

The hyper move to the upside is too fast too much. Rally’s are good, but to build a trend and strong market, you need rallies to be based on normal distribution, building volume, and low volatility. Just like to the down-side – any hyper moves are usually retraced pretty quickly. The move in the indices is more indicative of a massive short-covering or order imbalance. We have been hitting resistances not over a few days or weeks, but intra-day. That spells volatility!

INDU 11,600 / 11,800 (We visited 11,800 yesterday but retreated – on weakness going into the close. I think we COULD break-through – but it will be hard after the big rally up to these levels. I think a retracement is in the cards. I would get flat to short at 11,800 with Gamma. At 11,600 I would get flat.)

NDX 1900 / 1950 (We blew through it and came back off pretty good. Another blow off top? Look like it there is some futures pressure going into the opening, also the analyst are NOW coming out with “BUY” recommendations – which usually means a short-term top! Get flat to short in the 1950 area.)

SPX 1275 / 1300 (We closed above 1300 – but I wouldn’t call it support yet. Get flat at this area – while we will probably revisit it this morning – it’s a 50/50 as to whether it is a support or resistance – stay neutral at 1300 and treat it as a straddle strike!)

RUT 740 / 760 (WOW – this was just a nutty move of hyper volatility. 2% moves back to back and to revisit 760 in two days – is crazy. Over the last 2 days this has been more volatile than the narrower based indices and that is a little unnerving. That is NOT the norm. Expect more volatility. Do NOT get long at 740 – treat it as a straddle strike – we could move to 720 or 760 from 740 very quickly. There is NO volume between 720 and 760 from this move – that means that we have a massive band width of huge volatility and the RUT can land anywhere in that range. This is not a healthy or good sign as far as determining a trend to get bullish or bearish. This looks more like a Dot.com stock from late 1990s and not the broad low volatility index that it is. Be very careful. This will move hard and fast because of the wide band and low volume in the band. )

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Conclusion

The banks and firms buying back these securities either to get ahead of the probe or from the settlements is not something that want to be doing right now – when they are already cash strapped. What does it mean – well you can count on MORE visits to the Discount Window to carry those positions, more closings of equity lines, and if you thought lending was tight – well this just cranked it down even more. Expect borrowing rates to go up even more.

The good news is the Olympics – it’s been very exciting – however the none stop coverage of Boxing on the Universal HD channel is getting a little old – hope they change it up a little. One thing that I really like about the Olympics is that we see men and women competition against countries that are not allies with one another. The US vs. Cuba, North Korea vs. Germany, Iran vs. England, Japan vs. China. It’s nice that once every 4 years – we can put politics aside and see competition among the best in the world proudly representing their country.

The market is seeing some pressure in the AM, but that could change quickly. We had a hyper rally – so be very careful with long hard deltas.