9/29/08 (No Bailout Plan Yet - WHACKovia bites the dust!)

Traders,


Sorry no funny pictures the last couple of posts, haven't had the time and none today, maybe when things slow down a little I'll make the time.

The market was mixed, but was up for the most part on Friday, on "Hope" that the Bailout - sorry I mean - Rescue Package was going to be passed. However, it didn't happen on Friday - instead we waited - it had to be done before Sunday night when the Asian markets opened, but that didn't happened either. Instead it was a weekend of making an already complex unprecedented plan, even more complex and convoluted. They haven't voted on it because they are "SEEING" if they have the votes FOR it. They are really unsure if it would pass (even with all the changes) - but they are scheduled to vote as early as today.

What Main Street (the man on the street) will NOT understand is that this plan does NOT change the economic landscape, it will not keep companies from going under, it will not create jobs, it will not make the housing market rally, it will not reduce the price of gas. The plan is just to BUY toxic waste (bad loans) from the banks and transfer it to the government - the HOPE of this plan is that it will FREE up credit lines. Banks are not lending to each other, companies, or customers - because the toxic paper has SEIZED up credit lines. That is what the man on the street will not fully understand.

Here is the rub, Main Street has been frightened (rightly so) that it is the tax payer that is bailing out Wall Street, but when more banks fail, no new jobs are created, and the housing market continues to go down - Main Street will say "I thought we gave them $700 billion (of tax payer money) how come the market is still going down, how come banks are still failing, how come the job market is getting worse?" The big problem with the PLAN as it has been sold as a ANSWER to a problem that it can NOT solve! Main Street was sold a lemon!

So, even when they vote FOR this plan, don't expect it to SOLVE the problem - but rather create a bigger problem down the road (weakening the dollar). It will also take WEEKS before any money actually makes it way to these troubled companies and of course it will be argued over and over again about what paper to buy, what company to help, etc.

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WHACKovia - done?!

Rumors on Friday were that Wachovia was going to be the next to fail and go into receivership as early as Friday after the close. The stock saw pressure all day (down from $15 to $10) and then after the close was hit again (down another $2). Rumors of failure quickly change to rumors of a Citi or Wells Fargo takeover - but those were also just rumors. Sure they maybe in talks with Citi, but Citi has its own balance sheet problems. Nothing was resolve over the weekend - neither Citi or Wells came forward to confirm they would be taking over. Can Wachovia wait for the Plan to come to the rescue, probably not - (either they have too MUCH toxic waste or it will be too long before they can get the money). Will Citi or Wells take them over, probably not - the rumors are that Wachovia's balance sheet is REALLY that bad (remember the CEO sent out that forum letter to their employees - not sure what the future will hold.) The question right now is WHEN, when will they have to be bailed out or taken over before the FDIC chains the doors? Rumors were this weekend, but I think while those rumors "should of been" true - if it were not for the Fed and Treasury (also rumored) to be involved in the talks with Citi and Wells with Wachovia. They have been given the weekend (it seems) to find a solution, however, Sunday night came and went - no deal. It now seems like a TAKE-UNDER, Citi and/or Wells will probably buy the deposits (like IndyMac, WAMU, etc.) and the balance goes into receivership. Another bank bites the dust.

The stock is getting hit HARD - trading less than a $1 - that would confirm that Wachovia is done! FDIC is in their cars as we speak heading over to WHACKovia! You can't blame THAT on short-sellers - that is LONG SELLERS selling it!

UPDATE: It's done, Citi is buying the banking operations and absorb $42 billion of losses (of the $312 billion loan pool - depending on how that is Marked?!?!) the FDIC will absorb the losses beyond that (some believe it will be another $50-$100 billion in losses). The question is where does the FDIC come up with more money? They only have $40 billion left in their coffers. I guess the bailouter's (FDIC) will also need a bailout!

Needless to say it's a take-UNDER and yeah this IS a bailout, without the FDIC (backed by the Treasury) taking on a massive part of the risk - there would be NO deal. Remember - WHACKovia is the world's largest holder of Option Arms!


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Credit Tightens

You would think with a $700 billion dollar slush fund about to be approved that credit would loosen a bit, well that was the hopes of the Paulson Plan, but so far the exact opposite is happening. Lending rates, including LIBOR (London Interbank Offer Rate) started ramping fast (currently 3.88%) as more are concerned that the bailout plan is not enough - seeing WAMU fail and now this morning WHACKovia - is not giving the resounding feeling that this bailout plan is going to work. First the bankers ALL KNOW that $700 billion is a drop in the bucket compared to the $20 TRILLION in debt paper (mortgages, credit cards, car loans, etc) - the failure rate so far has exceeded $500 billion and the government has already FLUSH $300 billion down the toilet. Some say the $700 billion will be used up in 4-8 weeks and Paulson will be back with his handout for more. If you look just at Wachovia, GMAC those two are close to needing about 20-25% of the bailout package as it is (Actually it will be Citi that will need the money). What's funny about Citi agreeing to the take under of Wachovia, is that they KNOW they will have the back-stop to unload the bad paper ($42 billion worth) back on the government's Bailout Plan.

It's called deleveraging and we are nowhere CLOSE to seeing $700 billion flush enough into the system to free it up.

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Future Pre-market

The futures are getting a good smack down in the pre-market. WAMU last week, WHACKovia this morning, no bailout plan yet - and now credit seizing up worldwide. The futures are down! The stocks in the premarket are down as well - and that's on NO SHORT SELLING in over 800 issues - that is LONG SELLERS!

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Support / Resistance

We got a pop in the INDU on Friday and the other markets were mixed. However it's looking like we are going to test those supports again today.

INDU 10,500 (11,000) 11,500 (we closed above 11,000 on Friday - but it looks like we will open below it this morning. The list of ban short-selling has been increasing - but that is not keeping the market from falling. 11,000 is a pivot point - this afternoon is the vote. It COULD bring some optimistic buying into the market, but without the short-sellers it would also be hard to get a short-covering rally. Who knows - expect MORE volatility.)

NDX 1650 / 1700 (We are going to open below support - heading down to 1600 - could be.)

SPX 1150 (1200) 1250 (1200 is a pivot point - we closed above it on Friday this morning we will be back down below it. Unless the VOTE can spur optimism (abet short-term) it will be hard to get a solid rally out of this.)

RUT 680 (700) 720 (The RUT was flat on Friday and did not rally with the INDU or SPX and is looking very weak in the pre-market. 700 looks to be busted at the opening.)

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Conclusion

The global markets lost faith in the US getting their shit together. It's an election year and political games trump sound policy and decision making. The Democrats blame the Republicans, the Republicans blame the Democrats. Obama is talking blaming McCain about supporting Wall Street that got us into this mess, but Obama is SUPPORTING the Plan? McCain, who supposedly supports Wall Street is begrudgingly supporting the plan - but doesn't want to. Even the finger pointing is getting complicated - you need to be double-jointed to even point fingers anymore.

The Citi take (UNDER) of Wachovia is nothing more than a FDIC bailout in disguise. Citi will be able to dump that toxic paper back on Treasuries bailout plan after it passes. So at the end of the day, Citi gets the deposits and none of the Debt - that all goes to the FDIC (which doesn't have enough) so it really falls back on the Treasury again. They are bailing out companies even with OUT a plan.

Freddie and Fannie - now controlled by the Congress are back in business and yeah buying MORE toxic paper. You got to be kidding me.

It just seems that the government is leading the charge into the toilet!


Expect more volatility!